Kimberly-Clark Pays You A Boring But Beautiful 3.5% Yield

Summary

• Kimberly-Clark is a respectable name in the consumer staples space, with growing market share in key geographies.
• While it has some near-term headwinds, these issues are expected to ease in the latter part of this year.
• Meanwhile, KMB maintains a strong balance sheet and is poised to be a Dividend King shortly.

marchmeena29/iStock via Getty Images

Not all stocks are created equal and nor do they have to be. Some are higher risk, and carry the potential for bigger capital gains, while others provide lower volatility and can therefore introduce more stability to a portfolio.

This brings me to Kimberly-Clark (NYSE:KMB), which belongs to the more stable consumer staples space. It isn’t the cheapest name, but is far from being the most expensive among its peers. In this article, I highlight what makes KMB a sound Buy for sleep-well-at-night type returns, so let’s get started.

Why KMB Is A Buy

Kimberly-Clark isn’t necessarily a household name, but its brands certainly are, and are used by people in more than 175 countries. It’s been in existence for an impressive century-and-half and its family of products include Kleenex, Huggies, Scott, Kotex, Depend, and Pull-ups, to name a few. Its top 5 brands generate over $1B in annual sales each, and hold No. 1 or No. 2 positions in 80 countries. In the trailing 12 months, KMB generated nearly $19 billion in total sales.

One of the reasons for owning KMB is the stability that it can introduce to a portfolio. This is reflected by KMB’s low Beta score, which can help investors weather through tumultuous economic times relatively unscathed with respect to the rest of the market. As seen below, KMB carries a Beta score range that’s mostly trended in between 0.25 – 0.75 over the 3 years, including the volatile pandemic timeframe.

(Source: YCharts)

It's no secret that KMB has struggled to grow its top-line this year, as it faces a difficult comparable against significant volume growth last year due to the pandemic. It is reflected by organic sales declining by 3% YoY during the second quarter. For the full-year 2021, management now guides for 0-2 percent organic sales decline compared to the previous guidance for 0 to 1% sales growth.

On top of that KMB faces challenging commodity inflation, with a significant 30% increase in the price for pulp in North America, and more than a 90% increase in resin prices. It’s not realistic for KMB to raise prices in such manner to fully offset these costs, given their significant increase and volatility. As such, analysts expect a decline in KMB’s bottom-line this year, with a 13% decline in estimated EPS this year.

While the short-term picture does not appear to be rosy. I do see reasons to be optimistic around KMB in the long-term. This is considering that KMB’s brand investments are paying off, with market share gains in key countries. As seen below, KMB managed to grow market share for its strong Huggies diapers and Kotex feminine care brands in key countries, and Huggies is now the #1 diaper in China.

(Source: investor presentation)

As with any consumer staples company, marketing and brand engagement is key. It appears that management is effectively executing on this front. As noted by CEO Mike Hsu during Barclay’s global consumer staples conference last month, the company has increased its media investment over the past 3 years, and 70% of its media is now digital, which helps KMB to improve targeting and personalization, resulting in “significantly improved ROI.”

In addition, CFRA shares a favorable outlook for the company, as it believes near-term challenges will ameliorate in the second half of this year, as noted below in its recent analyst report:

We believe KMB’s results will get sequentially better as the company increased list prices in North America late in Q2. We expect these pricing actions, along with productivity savings, to result in sequentially stronger earnings over the next few quarters. We also expect KMB’s professional business, which focuses on solutions for workplaces, to gain momentum in 2H 2021.

Meanwhile, KMB maintains a strong A rated balance sheet, with $306 million in cash on hand, and a net debt to EBITDA ratio of 2.3x, sitting well below the 3.0x safe level that I use. It’s also worth noting that KMB is nearly a Dividend King, with an impressive 49-year track record of consecutive annual raises. It currently pays a healthy 3.5% dividend yield, with a reasonable 68% payout ratio (for a consumer staples company), and a 5-year dividend CAGR of 4.3%.

I see value in KMB at the current price of $132, with a forward PE of 19.6. This is considering the strength of KMB’s brands, increasing market share, and my belief that the company can weather through the near-term commodity inflationary pressures. Analysts estimate 5-12% annual EPS growth over the next 2 years, and have an average price target of $138. Additionally, CFRA has a higher 12-month price target of $142.

(Source: Seeking Alpha)

Investor Takeaway

Kimberly-Clark is a respectable enterprise in the consumer staples space, and is seeing its brand investments pay off, with market share growth in key geographies. While it has some near-term headwinds, I believe these issues will eventually ameliorate, and analysts expect sales to begin a positive reversal during the latter part of this year. I continue to see value in KMB and its dividend yield at the current price, and view it as a sound Buy for long-term income and growth.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Comments

[Sugar Charlie]

Nice dividend yield but poor chart, and flat analyst consensus revenue and earnings forecasts. I overweight consumer staples as bond substitutes, but having looked at KMB many times through the yeas I have avoided it in favour of other names, esp. PG in the same sub-sector.

[amegalo]

Yesterday I added to my position. I do this when a company’s stock bounces near its 52 week low.. I think this is a reliable method to add to long term hold positions.

[hawkeyec]

I have a good bit of this with too much of a gain to want to sell. As the price has gone up the yield has declined a good bit because the dividend has not risen as fast as the price. In addition, this company currently has a negative book value -- total debts exceed total assets -- a condition that is not terribly stable.

[Money 29]

Nice yield on dividend aristocrat KMB.

[Croogie]

a solid and boring company like $CL or $K in BUY area.

[alexalekhine]

What the heck is a "workplace solutions"?

[In Cog Neato]

@alexalekhine Products for businesses: bulk paper towels, cleaning supplies, bulk (large) TP rolls, etc. Those sales are down while workers have worked from home during the pandemic, since those products are not needed at places of businesses when the buildings are mostly empty.
As companies go back to work, those product sales will increase again and there will be added needs for antiseptic wipes and cleaning products including paper products.

[alexalekhine]

@In Cog Neato I love CorpSpeak today. Those aren't solutions. They're just freaking cleaning supplies. As for those large TP rolls, they should start marketing those to housepainters as a cheaper alternative to sandpaper. Have a fun day.

[In Cog Neato]

@alexalekhine It's corporate newspeak all right. For example, when a company presentation highlighted using "leveraging," many times they really were just paying someone or something for services, rather than having an advantageous position over competitors.
Example: When IBM stopped being a computer company, and became a service company, didn't they refer themselves as a "Solutions" company? You see it all over, once you're made aware of corporate newspeak. Check it out:
www.ibm.com/...
They're not the only one.
An acquaintance once referred to "Airline management." No, nothing to do with the airlines, just that corporate management would read an article in a airliner seat pocket magazine about management and before you know it, everyone was implementing what they read.
When you hear anyone, especially corporate management, using business cliche, you know they are followers and not leaders. "Low hanging fruit."

"It'll change your life" was an advertising mantra for a decade, and I'd shudder every time I'd hear it in a TV or radio commercial. Changes can be good and changes can be bad. But the companies using that mantra didn't even think about that, but only thinking that they could sell more snake oil to the gullible public.