Weekend Reading 10/30/2010

Dividend Stocks 101: The Essential Guide
If you’re new to the site, check out this key resource.

For anybody who likes Warren Buffett, this speech of his basically sums up most of his important points. If I had to describe Buffett to someone, I would simply point them to this speech.

He starts off with a short talk, and then delves into answering questions by the audience. It’s years old, but 95% of it is timeless. Only a few points touch on contemporary issues of the time, like specific investments. The speech is divided into several videos, and so if it interests you, there is quite a bit of material to watch. The first part is posted here, and you can easily find the following parts at the bottom of the video at the end of the this part.

Several useful articles have been posted on the web, so here are a few select articles for reading this week:

Sysco Corporation (SYY) Dividend Stock Analysis
Dividend Growth Investor offers an analysis of this conservative dividend champion.

17 Stocks With Room To Grow Their Dividend
Dividend investors want a safe dividend, a large dividend, and of course a growing dividend. Dividends Value provides a useful list of companies that have a FCF payout ratio of below 40%, meaning they have plenty of room to continue to grow their dividends.

Tabacco Stocks: Where Vice Meets Dividends
The Dividend Guy highlights several tobacco companies, showcases their impressive dividend yields, and asks reader opinion on the concept of investing in the tobacco industry.

This Week’s Best Dividend Stock Evaluations
If you want more dividend stock analysis, Dynamic Dividend has a list of some great individual stock evaluations for this week.

Financial Newsletters and Empty Promises
Andrew Hallam sheds some light on the truth about financial newsletters.

The Rule of Thumb
Defensiven has posted 34 articles in October, and that’s quite a feat. Google’s translator has quite a bit of work to do to keep up with that kind of output. Check out some of his articles.

What Will It Take for Natural Gas Prices To Fire Up?
Beating the Index analyzes the issue of low natural gas prices, and possible catalysts for change.

Don’t Let Your Emergency Fund Rot
Dividend Dollar shares his opinions on emergency funds.

How To Be Clutch In Stressful Situations
Investing is more about mental clarity than intelligence or phenomenal financial analysis. That’s why Financial Samurai’s article about dealing with stressful situations is highly relevant to long-term investors.

Does This High Net Worth Balance Sheet Inspire or Depress
My Journey to Millions offers a look into the balance sheet of a high net worth individual.

Dividends- Explained
Young and Thrifty discusses the merits of dividends and also points out some Canadian dividend tax information.

Invest In Businesses That Are Easy To Understand
Buy Like Buffett offers up some important wisdom. The concept is simple, the less you understand your investments, the more you set yourself up for problems.

How To Find Top Dividend Stocks
Want a list of dividend aristocrats that have a dividend yield between 3% and 5%, a payout ratio below 60%, and a PE of under 20? Passive Family Income offers up eight companies that make the cut.

Best Advice A Blogger Can Give
Money Man from Financial Odyssey posted a few pieces of financial advice from seven financial bloggers.

Someday My Ship Will Come In
Are you waiting for some future event to make everything better, or are you working towards the solution right now? The Simple Dollar posts an article on the subject.

Dividend Income Update
My Own Advisor points out that dividends don’t lie. Let the market go up, let the market go down, and keep getting your growing dividend income.

Three Lessons Learned From Observing Monkeys
Invest It Wisely brings back some wisdom from Monkey Island.

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5 Dividend Stocks On Sale

Everyone loves a good value. In search for one, it makes sense for most investors to be looking for high quality companies trading for a good price rather than mediocre companies trading at bargain prices. Dividend stocks on this list each face certain risks and are not necessarily recommendations, but they may not be a bad place to look for some solid dividend investments. So, without further delay, here’s five high-quality names currently on the discount rack:

Chevron (CVX)

Chevron is the second largest oil company in the United States. Although the company experienced a decline in revenue and earnings in 2009 due to falling oil prices, the company remained profitable, continued to grow its dividend and assets, and now is in a period of recovery with an exceptionally strong balance sheet. The company managed to increase its shareholder equity by an average of 10% per year over the past five years, straight through the recession.

Through a combination of increased worldwide energy demand, core production growth, dividends, and share repurchases, Chevron may be poised to outperform over the long-term.

Dividend Yield: 3.40%
Trailing P/E: 10.0
Full Analysis

Texas Instruments (TXN)

Texas Instruments is one of the country’s largest semiconductor companies. Although they’re quite well-known for their calculators, the company focuses on analog, embedded, and wireless products, and has a large market share in all of those categories. Texas Instruments benefits from increased usage of smart phones, and has an excellent balance sheet with a current ratio of 4 and zero debt. Unlike Intel which has been diversifying its business, Texas Instruments has been streamlining and focusing its business into the few primary segments listed above.

The company has high dividend growth, and recently announced a $7.5 billion share repurchase program which, at the current low valuation, is a better bargain than previous share repurchases. The company has been making small acquisitions within its areas of focus, and has increased its manufacturing ability during the market downturn.

Dividend Yield: 1.80%
Trailing P/E: 12.4

Novartis (NVS)

Novartis is a huge global health care company based in Switzerland. The company is incredibly diversified, offering a variety of pharmaceuticals, consumer health products, and animal health products. With a strong balance sheet and quickly growing revenue, the company appears to be in a position to offer great long-term returns. Due to their strong pipeline, the company’s valuation is a bit higher than many other health care companies, but lower than the market in general (and comparable to JNJ).

Dividend Yield: 3.40%
Trailing P/E: 13.3

Exelon (EXC)

Exelon is the largest nuclear energy producer in the United States. With 17 nuclear reactors, Exelon produces energy for millions of people.

Unfortunately, Exelon also has some unfunded pension accounts, and is facing a likely future earnings decline due to low natural gas prices. Low natural gas prices mean that utilities that generate electricity via natural gas are very competitive with Exelon’s nuclear power, and therefore the company’s moat has been temporarily breached.

The low stock price seems to currently be factoring these things in. I wouldn’t look for the dividend to grow much, if at all, until Exelon can increase its earnings. The CEO, however, recently stated that maintaining the dividend is extremely important, and Exelon expects to maintain it even with gas prices staying low for quite a while.

Exelon recently agreed to acquire John Deere Renewables, paying $860 million for over 700 MW of wind power and additional wind power under development.

Dividend Yield: 5.10%
Trailing P/E: 10.4
Full Analysis

Chubb Corporation (CB)

A leading multi-national property and casualty insurer, Chubb is exceedingly skillful and efficient in underwriting, achieving a combined ratio of 86%.

The company’s written premiums have been decreasing somewhat during this recession, but the company’s underwriting has been very profitable. The company has a policy of not sacrificing underwriting quality to chase premium growth. Shareholder returns will be largely driven by dividends and share repurchases, which at the current stock valuation are an excellent value.

Dividend Yield: 2.50%
Current P/E ratio: 8.6
Full Analysis

Full Disclosure: I own shares of CVX, TXN, CB, and JNJ. I have no positions in EXC, NVS, or INTC.
You can see my full list of individual holdings here.

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Kimberly-Clark Corporation (KMB) Dividend Stock Analysis

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

Year Revenue
2009 $19.155 billion
2008 $19.415 billion
2007 $18.266 billion
2006 $16.747 billion
2005 $15.903 billion
2004 $15.083 billion

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

Earnings Growth

Year Earnings
2009 $1.844 billion
2008 $1.690 billion
2007 $1.823 billion
2006 $1.500 billion
2005 $1.568 billion
2004 $1.800 billion

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

Year Cash Flow
2009 $3.481 billion
2008 $2.516 billion
2007 $2.429 billion
2006 $2.580 billion
2005 $2.312 billion
2004 $2.726 billion

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

Year Dividend Yield
2010 $2.64 4.00%
2009 $2.40 4.50%
2008 $2.32 3.80%
2007 $2.12 3.30%
2006 $1.96 3.30%
2005 $1.80 2.90%
2004 $1.60 2.50%

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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