As an investor, you want the odds on your side.
When investing in a company, you’re basically making a bet that the company will continue to make more money and be more successful, year in and year out, over the long haul.
You naturally want to see your investment become worth more over the long term, which is almost always a result of a company increasing its profit (and becoming worth more in the process).
If you treasure your hard-earned cash as much as I do mine, you want the odds on your side when you’re making long-term bets like these.
And when trying to maximize my odds, I like to invest in companies that offer a business model that makes it easy to see how and why they’re going to make more money for many more years to come.
For instance, technology companies are sometimes difficult to invest too heavily in.
And that’s because I don’t know what’s going to happen with smartphones or computer chips over the next 20 years.
Technology changes extremely fast.
But you know what doesn’t change very fast?
Diapers, facial tissue, paper towel, and bathroom tissue.
These products haven’t changed much in 20 years – and the odds are pretty good that they won’t change very much over the next 20 years, either.
That’s why a company like Kimberly-Clark Corp. (KMB) has done pretty well for itself (and its shareholders) selling these types of products.
It was founded way back in 1872, and you don’t build the kind of staying power necessary to still be relevant and profitable almost 150 years later if you’re not providing quality products that people demand.
Kimberly-Clark Corp. is a consumer products company that manufactures and markets a number of branded household products across the world.
They operate across three global businesses: Personal Care (49% of FY 2016 sales); Consumer Tissue (33%); K-C Professional (18%).
North America accounted for 52% of the company’s FY 2016 sales.
This company is just a monster. They have a number of leading brands, including five billion-dollar brands: Huggies, Kleenex, Scott, Kotex, and Cottonelle.
These brands are sold in more than 175 countries, and nearly one quarter of the world’s population purchase their products every single day. The company holds a #1 or #2 brand share in 80 countries.
The great thing about their products is that they must be replaced once used. You obviously can’t keep reusing personal tissue or diapers. So this creates a fantastic and reliable source of recurring revenue for the company.
And speaking of recurring revenue, let’s see what kind of revenue and profit growth the company’s been able to post over the last 10 years. Their fiscal year ends December 31.
While revenue has been recurring over the last decade, it hasn’t really grown: Kimberly-Clark posted $18.266 billion in revenue for FY 2007, compared to $18.202 billion for FY 2016.
This is a mature, global company selling basic household paper products. So it’s not fair to expect huge growth. That said, I’d expect to see something at least in the low single digits here.
But the good news is that big top-line growth isn’t all that necessary in order to perpetuate growing dividends.
That’s because dividends are ultimately paid from profit (or free cash flow, more accurately).
Fortunately, Kimberly-Clark has posted good numbers in this regard over the last decade, thanks largely to share buybacks.
Earnings per share increased from $4.09 to $5.99, which is a compound annual growth rate of 4.33%.
Looking out over the next three years, CFRA believes the company will compound its EPS at an annual rate of 9%, which would reflect a nice acceleration off of what has transpired over the last 10 years.
Cost reductions, higher volumes, and focus on emerging markets are factored into this forecast.
The business growth is fairly solid, with what may be a major improvement on the horizon. But the dividend metrics tell me, as a dividend growth investor, exactly how seriously a company takes its relationship with its shareholders.
Well, Kimberly-Clark doesn’t disappoint here.
The stock is featured on David Fish’s Dividend Champions, Contenders, and Challengers document, which lists and tracks over 800 stocks that have paid increasing dividends for at least the last five consecutive years.
Actually, they’re more than just featured. They’re a “Champion” because they’ve increased their dividend for the last 45 consecutive years.
I’ve said it before, and I’ll say it again: you can’t pay shareholders increasing cash dividends for decades upon decades if you’re not doing a lot of things right. You practically cannot run a poor business while simultaneously paying your shareholders ever-larger dividends for years on end. It just doesn’t work like that.
Those dividends are paid in the form of cash, and they have to come from cash. Therefore, a business must generate more and more cash from selling more products and/or services in order to fund larger payouts. Poor businesses generally don’t build such reputations and track records.
And while over four decades of dividend growth is impressive in its own right, investors also want to make sure their purchasing power is at least staying intact over time; increasing purchasing power, however, is even better.
After all, if the dividend isn’t increasing, then it’s impossible for your passive income to keep up with inflation and rising prices.
Well, Kimberly-Clark has increased its dividend by an annual rate of 7.1% over the last decade.
That’s very solid growth, and that’s obviously higher than the EPS growth rate over the same period.
This has led to a payout ratio of 63.9%, which is moderately high.
A company like this (considering its business model and stable outlook) can maintain a high payout ratio, but I wouldn’t think you’d want this to expand much further.
So dividend growth will likely have to slow to a rate more in line with earnings going forward (something the company is specifically targeting).
But the current yield on shares, at 3.3%, is well above what the broader market is offering right now.
In my view, this stock is kind of in a “sweet spot”, where you have a 3% yield coupled with the potential for dividend growth that’s in the upper single digits.
Generally speaking, a good proxy for total return moving forward is the sum of the yield and dividend growth rate, assuming a static valuation. So a yield of 3%+ and dividend growth of ~7% can lead to total return near double digits, if the valuation remains unchanged.
The company’s balance sheet is leveraged but stable.
Shareholders’ equity is negative, but the interest coverage ratio is just over 10.
Now, you might wonder how profitable it is to sell paper products and diapers?
Fairly profitable, actually.
Net margin has averaged 8.7% over the last five years (ROE isn’t meaningful).
This is a good (but perhaps not excellent) result, but profitability in general has been on the uptrend of late. Ongoing cost reductions and further improvement in efficiency should only serve to continue that uptrend.
Kimberly-Clark might be thought of as a pretty mature company. With a market cap of $42 billion, you might be right there.
But that’s a great thing for a defensive investor looking to receive increasing dividend checks for decades to come.
They’re established in key markets around the world, selling products that people need. Moreover, these products must be replaced once used.
You might not experience huge growth with this kind of stock, but if you’re after stable, rising income, this seems like a good long-term bet.
Again, it’s all about playing the odds.
When it comes to feeling comfortable about the odds of collecting rising passive dividend income for decades to come, would you rather make a bet on artificial intelligence or diapers?
I like businesses that are easy to understand, sell products and/or services that are ubiquitous, are managed well, and reward shareholders handsomely and directly with growing dividends.
Kimberly-Clark checks all the boxes.
However, there are risks to an investment in the company.
Primarily, you have a very competitive marketplace. Diapers and paper products are obviously profitable, so there are other companies that have entrenched brands and market share that compete fiercely.
In addition, there’s essentially no switching costs involved, which makes it easy to move to a lower-cost product in one’s household.
Of course, like any global business, Kimberly-Clark is exposed to currency risks.
Shares in the company are trading for a P/E ratio of 19.2, which is a discount to the broader market. But I think this is a fair valuation for a stock like this.
The company’s cash flow is trading for a multiple that’s just below its three-year average.
And the current yield is just a few basis points away from its five-year average.
All in all, the stock appears roughly fairly valued at first glance.
I also valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 6.5%.
That DGR seems appropriate when considering the payout ratio, demonstrated 10-year DGR, forecast for profit growth moving forward, and the company’s own targets out over the foreseeable future.
The DDM analysis gives me a fair value of $118.06.
The stock thus appears to be fairly valued right now.
Bottom line: Kimberly-Clark Co. (KMB) is a global juggernaut selling products like paper towel, bathroom tissue, and diapers. People all over the world need these products on an everyday basis, and the fact that they can’t easily be reused means there is a constant source of recurring revenue in place. The odds are very good that their 45-year streak of increasing the dividend continues for decades to come, which should enrich shareholders for many, many years.
— Jason Fieber