Kimberly-Clark And The Power Of Dividend Growth

On a recent show, Jim Cramer called Kimberly-Clark Corporation (NYSE:KMB) an "underdog" in the industry. And surprisingly, we agree with Cramer. KMB is not only undervalued in its industry but we believe it is also undervalued when it comes to being considered a great dividend growth stock. When people talk about the personal products industry, Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL) come to mind. Not Kimberly Clark. Similarly, when talking about great dividend growth stocks, Coca-Cola (NYSE:KO) and McDonald's (NYSE:MCD) come to mind. Not Kimberly Clark.

Let us look at some basic details about KMB:

  • KMB has grown its dividend continuously since 1972
  • The current yield is close to 4%, much higher than Colgate's 2.5% and Procter & Gamble's 3.5%
  • The payout ratio works out to a comfortable 68%

As we did for other companies like Philip Morris (NYSE:PM) and Pepsi (NYSE:PEP) in past articles, let us evaluate what could happen if an investor sets his/her money aside with KMB for 10 years:

  • Assume you purchase 1000 shares at the recent price level of $78 for a total initial investment of $78,000.
  • A dividend growth rate of 6% has been assumed, even though KMB's average increase has been between 7% and 8% over the past 5 years.
  • The current yield works out to almost 3.8 % as shown in the table below.
  • Notice how the dividend payments and the yield on original cost almost double in 10 years, leading to $5300 in annual dividends.
  • These numbers are much higher than the numbers calculated for Colgate using similar steps and slightly higher than Procter & Gamble's.
  • We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
  • Capital gains will almost certainly contribute to the overall returns as well. However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around, as one would accumulate more shares.
  • Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
  • 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.

(Click to enlarge)

Conclusion: While KMB's current PE and dividend yield already make it an undervalued play in the personal products industry, the dividend growth extrapolation exercise has confirmed that KMB will be a good addition to any long term portfolio. As stated earlier, investors with longer time horizon would do well to look at the future yield on original cost. And yes, it does feel weird to agree with Jim Cramer for a change.

Disclosure: I am long PM, KO. May initiate a position in KMB on pullbacks.

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