Thursday, November 7, 2019

Kimberly-Clark (KMB) Dividend Stock Analysis

Kimberly-Clark Corporation (KMB), together with its subsidiaries, manufactures and markets personal care, consumer tissue, and professional products worldwide. It operates through three segments: Personal Care, Consumer Tissue, and K-C Professional.

This dividend champion has paid dividends since 1935 and has increased them for 47 years in a row. The last dividend increase occurred in January 2019, when the board of directors raised the quarterly payment by 3% to $1.03/share.

Between 2008 and 2018, Kimberly-Clark managed to grow earnings from $4.05/share to $4.03/share.  The figures should be adjusted upwards in my opinion for the impact of the 2018 restructuring program to the tune of $2.24/share. This would bring the figures closer to $6.27/share. If you add-in one-time items related to the US tax reform to the tune of 33 cents/share, we come up with adjusted EPS of $6.60/share. Kimberly-Clark is expected to earn $6.82/share in 2019.

Demand for company’s products is relatively stable and relatively recession resistant. There is a high probability that people will still be using tissues, toilet paper and other products that KMB produces for several decades out. Demand won’t change drastically during a recession.  The company can grow earnings through new product innovation, expansion in emerging markets and taking cost out through streamlining of operations. Product marketing should keep customers continuing to buy branded products, rather than switching to generics, which are perceived as lower quality by consumers and are not really saving a lot of money per item either.

In 2019 the company unveiled its K-C Strategy 2022, whose objective is to deliver growth and create shareholder value in what is viewed as a challenging business environment. This would be achieved by growing Kimberly-Clark's iconic brand portfolio, leveraging the company's strong cost and financial discipline and allocating capital in value-creating ways. (Source:)

Key highlights:
The company will target to grow sales in-line with, or slightly ahead of, category growth rates. Kimberly-Clark's three growth pillars are to elevate core businesses, accelerate growth in D&E markets and drive digital marketing and e-commerce. The company expects to achieve these pillars by launching differentiated product innovations, driving category development and leveraging commercial capabilities in sales and marketing.
The company will generate savings in order to fund growth initiatives and improve margins. Focus areas will include driving ongoing supply chain productivity improvements through the FORCE program ( a 4 year cost-savings target of $1.5 billion through 2021), executing the 2018 Global Restructuring Program ( workforce reductions of 12 – 13% of headcount that could save 500 -550 million per year, while eliminating or selling manufacturing facilities.), rigorously controlling discretionary spending to sustain the company's top-tier overhead cost structure and driving further improvement in working capital.

The company will allocate capital in value-creating ways, enabled by strong cash generation. Kimberly-Clark expects to spend capital at an annual rate of 4 to 5 percent of net sales after completing the 2018 Global Restructuring Program. In addition, the company plans to return significant amounts of cash to shareholders through dividends and share repurchases.
The company's medium-term financial objectives associated with K-C Strategy 2022 assume that category growth remains relatively modest and similar to recent conditions.

The objectives are as follows:
Sales and organic sales growth - 1 to 3 percent annually.
Adjusted earnings per share growth - mid-single digits annually.
Adjusted Return On Invested Capital - at least maintain at current level.
Dividend growth - generally in line with adjusted earnings per share growth.

The company has maintained a very consistent stock buyback program over the past year. Between 2008 and 2018, the number of shares decreased from 419 million to 350 million.

The annual dividend payment has increased by 6.20% per year over the past decade, which is higher than the growth in EPS. This has been achieved mostly due to the expansion of the dividend payout ratio. In January 2019 the Board of Directors approved a 3% increase in the quarterly annual dividend to $1.03/share. I believe that future dividend growth will likely be closer to 4% - 5%/year over the next decade, mostly driven by growth in earnings per share.

The dividend payout ratio has increased from 57% in 2008 to almost 61% in 2018. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I find Kimberly-Clark to be close to fully valued at 19.60 times forward earnings. The stock yields 3% and has a sustainable distribution.

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Dividend Aristocrats for 2019 Revealed
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