Over the past decade this dividend stock has delivered an annualized total return of 2% to its loyal shareholders.
The company has managed to deliver an average increase in EPS of 3.40% per year since 2000. Analysts expect Kimberly-Clark to earn $4.64 per share in 2010 and $5.01 per share in 2011. This would be a nice increase from the $4.52/share the company earned in 2009. The company’s EPS has been aided by the consistent share buybacks, which has led to a 3.10% average decrease in total shares outstanding per year. This means that over the past decade net income has been mostly flat.
The company has been trying to increase market share through product innovation and increased marketing. The company is under intense inflation pressure, but is closely. It has worked closely in streamlining operations in the sluggish North American market, eliminating positions and closing several facilities. Over the past several years, the company has only been able to pass on to consumers just half of the price increases that it experienced. Commodity prices could be detrimental to total costs at the company, as is the competitive nature of developed markets in which Kimberly-Clark does business. As with other consumer products companies, the growth is likely to come from developing and emerging markets, rather than developed markets. Developed markets could benefit from cost cutting and efficiency profits, which would decrease the total price of doing business. Under the company’s global business plan, announced in 2003, it is looking for annual sales growth in the 3%-5% range, EPS growth in the mid to high single digits and dividend increases in line with earnings growth. For more on the global business plan, check this document.
The company’s high return on equity has been on the rise since hitting a bottom at 25.70% in 2006. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 9.30% per year since 2000, which is substantially more than the growth in EPS. This dividend growth has been possible mostly due to the expansion in the dividend payout ratio. Without growth in earnings, future dividend growth would be limited. A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1980, we see that Kimberly-Clark has actually managed to double its dividend every seven and a half years on average. I expect modest dividend growth of up to 6% per year in the future, which could translate in the dividend payment doubling every twelve years.
Over the past decade the dividend payout ratio has increased from 32.30% to over 53%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Kimberly-Clark is attractively valued at 14.40 times earnings, yields 4.20% and has a sustainable dividend payout. In comparison Procter & Gamble (PG) yields 3% and trades at a P/E of 15.90, while Colgate-Palmolive (CL) yields 2.60% and trades at a P/E of 18.80. The issue with Kimberly-Clark is that it has not been able to increase net income over the past decade. The reason behind the increase in earnings per share is because it consistently repurchased shares. In addition to that, the company was able to deliver dividend growth by paying a higher portion of earnings in the form of dividends. Over the next few years I see Kimberly-Clark raising dividends by 4% - 5% per year. The company is suited for investors seeking current income, but should be able to deliver decent total returns over the next decades. I would continue monitoring Kimberly-Clark and will consider adding to my position in the stock on dips.
Full Disclosure: Long KMB
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