Summary

Kimberly-Clark (KMB) is a diversified, international paper-products company.
-Five year annualized revenue growth: 5%
-Five year annualized earnings growth: <1%
-Five year annualized EPS growth: 5%
-Dividend Yield: 4%
-Dividend Growth: 9%
-Moderately weak but stable balance sheet.
-With a P/E of 14, and an above-average dividend yield with decent dividend growth prospects, KMB is in a good position to provide reasonable risk-adjusted returns to shareholders.

Overview

Kimberly-Clark (NYSE: KMB) is a leading international paper products company. Founded in 1872 and incorporated in 1928, Kimberly-Clark has over 56,000 employees. Top brands of the company include Kleenex tissues, Scott paper towels and toilet paper, Cottonelle toilet paper, Huggies diapers, Depend adult diapers, Kotex feminine products, Pull-Ups, and more.

The primary raw ingredient for many of their paper products is Cellulose fiber. Synthetic super-absorbent materials are important materials for many of their products as well.

Business Segments

Kimberly Clark is broken down into four main segments.

Personal Care

This segment includes diapers, training and swim pants, feminine products, and incontinence products. Sales for 2009 for this segment were $8.4 billion, which represents 44% of the total sales, and the operating profit margin was 20.8%.

Consumer Tissue

This segment includes facial issue, bathroom tissue, and paper towels. Sales for 2009 for this segment were $6.4 billion, which represents 33% of the total sales, and the operating profit margin was 11.5%.

K-C Professional and Other

This segment includes disposable health and hygiene products for commercial use. This includes facial tissues, bathroom tissue, paper towels, wipers, absorbent products, and safety products. Sales for 2009 for this segment were $3.0 billion, which represents 16% of the total sales, and the operating profit margin was 15.4%.

Health Care

This segment includes disposable surgical products, infection control products, gloves, pain management products, and more. Sales for 2009 for this segment were $1.4 billion, which represents 7% of total sales, and the operating profit margin was 17.8%.

Kimberly-Clark operates globally. 53% of total sales came from North America, 31% came from Asia, Latin America, and Other, and 16% came from Europe. The company also has facilities around the world, including 28 in North America, 20 in Europe, and 64 in Asia, Latin America, or elsewhere.

Revenue, Earnings, Cash Flow, and Margin

Kimberly-Clark has been consistently growing company revenue, but earnings have remained flat.

Revenue Growth

KMB has grown revenue by an average of 5% annually over the past five years.

Earnings Growth

Company earnings growth has averaged less than 1% annually over this five-year period. Over the previous twelve months, however, KMB has increased earnings to over $1.9 billion, so numbers for 2010 likely will have improvement over 2009.

In 2004, KMB reported an EPS of $3.61. In 2009, KMB reported an EPS of $4.52. So, EPS growth over this same time period has been nearly 5% annually due to share repurchases.

Cash Flow Growth

Cash flow from operations has grown by an average of 5% annually. All of this growth occurred due to the results from 2009, which included a half-billion-dollar reduction in inventory along with large increases in accounts payable and other current liabilities, and a decrease in working capital.

Metrics

Kimberly-Clark has a net profit margin of 10%. Return on Equity (ROE) is nearly 35%, though this largely is inflated by their leveraged position. Return on Investment (ROI) is over 18%.

The P/E ratio is a bit over 14 and the P/B ratio is nearly 5.5.

Dividends

Kimberly-Clark has been paying quarterly dividends continually since 1935. As of this writing, KMB offers a dividend yield of approximately 4% with a payout ratio of less than 55%.

Dividend Growth

Kimberly-Clark has grown its dividend by approximately 9% annually over the past six years. Besides the peak in 2009 due to the stock market bottom, the company’s dividend yield has been increasing just about every year. This is due to KMB being at a much lower valuation than in previous years.

KMB generates a very attractive amount of free cash flow, which is cash flow from operations minus capital expenditures. The company reported more than $1.4 billion in free cash flow in 2007, more than $1.6 billion in 2008, and more than $2.6 billion in 2009. Since the company pays less than $1 billion in dividends each year, the dividend is well-covered by free cash flow.

Balance Sheet

Kimberly-Clark has a long-term debt/equity ratio of 0.9, which is not as low as I would like to see. Of the approximately $5 billion in total shareholder equity, more than $4.8 billion of it consists of intangibles and goodwill.

The interest coverage ratio is over 10, which means KMB’s debt is well-covered by earnings and therefore quite safe. The company is leveraged but not overly so.

Investment Thesis

Kimberly-Clark is a defensive stock with an above-average dividend yield and a low-to-moderate P/E ratio. The company generates a significant amount of cash flow, and uses much of it for dividends and share repurchases. Share repurchases at reasonable prices help the company continually increase its EPS and dividends-per-share.

In 2003, Kimberly-Clark launched their Global Business Plan. The goals of the plan are as follows:
Top Line Growth: 3-5%
EPS Growth: mid-high single digits
Operating Margin Improvement: 30-50 basis points
Capital Spending: 4.5%-5.5% of net sales
ROIC Improvement: 20-40 basis points
Dividend Increases: In Line with EPS

EPS growth in the mid-to-high single digits coupled with a 4% dividend yield results in a low-double-digit rate of return. Perhaps 10%, assuming that the valuation doesn’t significantly decrease over the long-term. In an era where some people are predicting that the “new normal” will be 5% or so returns from equities, aiming for around 10% with recession-resistant products is pretty good.

The company has been making several acquisitions recently. In 2009, KMB acquired the remainder of Andrean (a current subsidiary), Jackson Products (a safety products company), Baylis Medical Company’s pain management business, I-Flow Corporation (producer of drug delivery systems, pain relief products, and surgical site care).

Kimberly-Clark has a portfolio of quite strong brands. One of the biggest accomplishments a marketer can achieve is to literally turn their brand name into the universal name of that product. For instance, many people refer to Cola products as “Coke” regardless of whether it’s actually a Coca Cola product or a competitor’s product. In Kimberly-Clark’s case, many people literally refer to tissues as a “kleenex” whether it’s actually a Kleenex product or a different brand. To a lesser extent, Kimberly-Clark has done the same with their Huggies brand of diapers.

Risks

Kimberly-Clark, like any company, faces risk. Although the company produces a set of necessary products, the company does face some risk from economic weakness. KMB also faces risks from commodity costs and currencies. Walmart (WMT) alone accounted for 13% of KMB sales in 2009, so that’s a fairly important relationship. Competition is also quite intense, as although the brand-names are strong, the products are easily switchable and consist of basic materials.

Conclusion and Valuation

In conclusion, Kimberly-Clark may make for a good defensive stock pick. With a P/E ratio of 14, the stock is moderately valued. The company has strong brands, but also operates in an industry where products are easily replaceable. The balance sheet is a bit of a weakness as well. On the other hand, cash flow, and particularly free cash flow, is abundant. Most of the shareholder returns will be due to consistent dividends and share repurchases, and the overall risk-adjusted return looks favorable.

Full Disclosure: I do not have any position in KMB at the time of this writing. I have no position in WMT, and I do own shares of KO.
You can see my full list of individual holdings here.

Further reading:
Chevron Corporation (CVX) Dividend Stock Analysis
Compass Minerals International (CMP) Dividend Stock Analysis
Costco Wholesale (COST) Dividend Stock Analysis
Chubb Corporation (CB) Dividend Stock Analysis
Diageo Corporation (DEO) Dividend Stock Analysis

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