There’s no feeling quite like the one that comes from getting paid just to exist.
Wake up, get paid.
That’s about as good as it gets in life.
And when you get passively paid enough to cover all of your bills?
Pure bliss.
The crazy thing is, this is an attainable situation for almost anyone out there willing to delay gratification, live below their means, and intelligently invest their savings over the long run.
Regarding that last bit, dividend growth investing might just be the best strategy you could follow.
This is a long-term investment strategy pushing the idea of buying and holding shares in high-quality businesses that reward shareholders with reliable, rising dividend payments.
Those rising dividend payments are about as passive as it gets in life, requiring no more ongoing actions or work after one initially buys and holds shares in a company paying the dividends.
It’s a “one-and-done” thing which can, quite possibly, lead to getting paid just to exist… for the rest of your life.
You can find hundreds of stocks that qualify for the strategy by pulling up the Dividend Champions, Contenders, and Challengers list.
This list has invaluable information on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
After all, what’s better than totally passive dividend income that pays you just to exist?
Totally passive dividend income that is systematically rising every single year!
Many of these stocks are the “cream of the crop”, representing equity in businesses that rank among the world’s best, which is why they’re able to consistently generate the ever-larger profit necessary to sustain ever-larger dividend payouts.
It’s a self-reinforcing mechanism, almost forcing investors into great long-term investments.
I can say for sure that it’s worked for me, as I’ve used this strategy to build the FIRE Fund.
That’s my real-money portfolio, and it throws off enough five-figure passive dividend income for me to live off of.
This has actually been enough for me to live off of since I quit my job and retired in my early 30s.
My Early Retirement Blueprint explains how that was possible.
Now, as important as buying the right stocks is, buying at the right valuations is just as important.
While price is what you pay, it’s value that you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Slowly accumulating undervalued high-quality dividend growth stocks can be the gateway to getting paid ever-more passive dividend income just to exist, which is a wonderful and life-changing position to be in.
The preceding section on valuation may seem a bit heavy for the uninitiated, but fear not.
Lesson 11: Valuation, written by fellow contributor Dave Van Knapp, deftly explains the ins and outs of valuation in very simple terms and even provides a template you can easily use on your own.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Kimberly-Clark Corp. (KMB)
Kimberly-Clark Corp. (KMB)Kimberly-Clark Corp. (KMB) is an American multinational consumer goods and personal care corporation.
Founded in 1872, Kimberly-Clark is now a $34 billion (by market cap) consumer products leader that employs 38,000 people.
The company reports results across three segments: North America, 55% of FY 2024 revenue; International Family Care and Professional, 28%; International Personal Care, 17%.
Kimberly-Clark specializes in tissue-based products, such as paper towels and tissue paper, and it sells its products across 175 countries worldwide.
Iconic, billion-dollar brands from Kimberly-Clark include the likes of Cottonelle, Depend, Huggies, Kleenex, Kotex, and Scott.
What’s really reassuring about Kimberly-Clark is the simplicity of the business model.
The great Peter Lynch advised to never invest in any idea that you can’t illustrate with a crayon.
Well, Kimberly-Clark easily passes the “crayon test”.
We’re essentially talking about everyday paper products here.
Incredibly basic.
Yet, this basic idea has worked very successfully for more than 150 years.
A lot of that comes down to the fact that these simple paper products are consumable and must be repurchased again once used.
Once, for example, tissue paper is used, it’s used up and must be thrown away.
Nobody is reusing tissue paper.
Moreover, the various products that Kimberly-Clark produces and sells are almost necessary to everyday life.
This combination leads to an incredible degree of recurring revenue for Kimberly-Clark.
Also, because of how timeless these products are, investors have plenty of long-term visibility into the viability of the business model.
This is why Kimberly-Clark has been extremely consistent over many decades when it comes to revenue, profit, and dividend growth – and it’s why the company should remain consistent for many decades to come.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Illustrating that consistency is the company’s highly impressive track record of increasing its dividend for 53 consecutive years.
That elevates it to its vaunted status as a Dividend Aristocrat and Dividend King.
It’s clear that Kimberly-Clark cherishes its ability to reward shareholders with reliable, growing dividends, which should be music to any dividend growth investor’s ear.
Its 10-year dividend growth rate of 4% isn’t terribly high, although this does exceed the rate of inflation under ordinary circumstances.
For those wishing for a high-growth type of investment, Kimberly-Clark isn’t going to be suitable.
However, for those interested in reliable income that can grow in line with, or better than, inflation, this can make a lot of sense.
Speaking of income, that’s where the stock starts to shine again.
The stock yields 4.9%.
That’s a very nice yield.
It’s about four times higher than what the broader market will give you.
Furthermore, this yield is 140 basis points higher than its own five-year average.
That spread indicates the possibility of an interesting opportunity afoot, which is why I’m featuring it today.
The one chink in the dividend armor, though, is the payout ratio.
At 84.1%, it’s noticeably elevated.
While the dividend is covered, it’s not positioned for growth in excess of what the business will do.
Said another way, I wouldn’t necessarily expect any kind of acceleration in the rate of dividend growth over the near future.
Still, a ~5% yield backed by inflation-beating dividend growth is a very acceptable situation for income-minded investors out there.
As long as Kimberly-Clark can simply avoid cutting the dividend – an event which I think would be avoided at all costs – shareholders can sit back and be happy.
Revenue and Earnings Growth
As acceptable as this situation may be, though, a lot of it is based upon the past.
However, investors must always be thinking about the future, as the capital of today ultimately gets risked for the rewards of tomorrow.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be instrumental for the valuation process.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this manner should give us enough to formulate an estimate of where the business may be going from here.
Kimberly-Clark grew its revenue from $18.6 billion in FY 2015 to $20.1 billion in FY 2024.
That’s a compound annual growth rate of 0.9%.
Very tepid top-line growth.
It’s a staid, steady business, but it’s not one that’s growing sales briskly.
Meanwhile, earnings per share increased from $2.77 to $7.55 over this period, which is a CAGR of 11.8%.
This result isn’t actually all that accurate, as it represents a favorable starting and ending points.
FY 2015 EPS compressed from the deconsolidation of the company’s Venezuelan business from its balance sheet, whereas FY 2024 featured unusually strong margins.
If you look at some of the other rolling 10-year periods, Kimberly-Clark appears to be growing its EPS at around a mid-single-digit rate.
Not exceptional, but also not terrible.
An 8% reduction in the company’s outstanding share count, owed to steady buybacks, did help to drive excess bottom-line growth over the last decade, and this is a common lever that management has pulled to wring as much as it can out of that tepid sales growth, but the pulling of this lever will be limited going forward (which I’ll discuss in a moment).
Looking forward, CFRA believes that Kimberly-Clark will compound its EPS at an annual rate of 10% over the next three years.
In my view, that’s a pretty aggressive target for a company that simply hasn’t demonstrated that kind of ability for quite a long time.
However, a bright spot for Kimberly-Clark, at least relative to a lot of CPG peers, is the fact that growth has been occurring from volume gains, not just price taking.
CFRA highlights this: “[Kimberly-Clark] delivered strong Q3 revenue, beating consensus and marking the seventh consecutive quarter of positive volume/mix growth rather than pricing. This demonstrates successful strategic pivot to higher-quality growth as innovation resonates with consumers.”
Indeed, almost all of the sales growth for Q3 FY 2025 was driven by volume.
As noted in the company’s earnings release: “Organic sales increased 2.5 percent driven by 2.4 percent volume growth, while portfolio mix and price were broadly in line with a year ago.”
In the broader industry, volume growth has been challenged; seeing Kimberly-Clark buck this trend is encouraging.
An underrated part of the business is its leadership (estimated to be at a 15% market share) in the adult incontinence market.
This market has demographics tailwinds working to Kimberly-Clark’s favor, as an aging consumer pool can lead to more potential need of incontinence products (such as Depend).
Of course, there’s elephant in the room – an elephant which arrived only weeks ago.
On November 3, Kimberly-Clark announced a $48.7 billion deal to acquire Kenvue Inc. (KVUE), an American consumer health company.
Kenvue is the largest pure-play consumer health company by revenue.
Kenvue features iconic billion-dollar brands of its own, such as Johnson’s, Listerine, Neutrogena, and Tylenol (expanding the combined portfolio to ten different billion-dollar brands).
However, it’s that last brand – Tylenol – that is quite possibly giving Kimberly-Clark shareholders a headache, as this product has been facing an onslaught of negative news headlines and rising regulatory and litigation risks.
In addition, Kenvue has some concerns over ongoing talc litigation, which only adds to the question marks surrounding the rationale for the acquisition.
For its part, Kimberly-Clark rationalizes the move through enhanced scale, synergies, and a highly complementary business model with geographic and category overlaps.
Regarding the synergies, Kimberly-Clark is targeting $1.9 billion in cost synergies, which should drive significant EPS accretion in the second year.
Circling back around to CFRA’s forecast, Kimberly-Clark, with its acquisition folded in, sees double-digit total shareholder return (adjusted EPS growth + yield) ahead.
I have to say, I’m a bit less sanguine than CFRA and Kimberly-Clark here.
I have serious questions surrounding the acquisition, particularly relating to Tylenol, talc, and the debt that Kimberly-Clark will have to take on in order to pay for Kenvue.
It seems the market also has questions of its own, as it sent shares down more than 15% on the day the acquisition was announced.
The debt will limit buybacks – a key lever historically driving excess EPS growth – over the near term, until the debt load can be lowered (which should be aided by additional cash flow and synergies).
On the other hand, it doesn’t appear that Kimberly-Clark is paying a dear price for Kenvue, as Kenvue is going for about 14 times cash flow.
If synergies can work out well, the price paid proves to be cheap, and litigation/regulation risks are overstated, this could work out well.
But the water, which has long been very clear for Kimberly-Clark, has been muddied.
I lean negative on the Kenvue acquisition, overall, and I’m not inclined to see 10% EPS growth as being realistic over the near term.
I’d anticipate more mid-single-digit EPS growth from Kimberly-Clark over the coming years, lining up with what the business has traditionally done, which would set the dividend up for like growth.
In my opinion, more of the same is a reasonable presumption to make, although the Kenvue acquisition throws a wrench into things.
Financial Position
Moving over to the balance sheet, Kimberly-Clark has a decent financial position.
The long-term debt/equity ratio is 7.1, while the interest coverage ratio is approximately 11.
The former number is artificially high, inflated by treasury stock on the balance sheet (from the buybacks).
The upcoming Kenvue acquisition will weigh on the balance sheet on a go-forward basis, quickly outdating these numbers.
There’s no fortress here, but the balance sheet is also not in any kind of danger.
Notably, S&P gives Kimberly-Clark an investment-grade credit rating of A for its long-term debt, although the outlook was recently revised to negative from stable (due to the Kenvue acquisition).
Profitability for the firm is strong.
Return on equity has averaged 401.5% over the last five years, while net margin has averaged 10.5%.
ROE is obviously juiced by the low common equity, but even ROIC frequently comes in at over 20%.
And the margins are respectable for the CPG space.
Overall, Kimberly-Clark is running a stable, reliable, predictable business largely based around consumable everyday tissue-based products, which has worked out quite successfully for more than 150 years.
And with economies of scale, brand recognition, entrenched retailer relationships with dedicated shelf space, and a global distribution network, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Competition has always been fierce in the CPG space, but litigation and regulation risks are now likely set to rise with the Kenvue acquisition.
The Kenvue acquisition will also add near-term execution risk.
Input costs, such as pulp, can be volatile, and inflation has recently been running hot.
The global footprint exposes the company to geopolitical risk and currency exchange rates.
Although most of the company’s core products are fairly insulated from economic pressures (since they are often a part of everyday life), an economic downturn can cause customers to trade down (especially on products such as paper towel) to private brands.
Adding to this last point, without switching costs to rely on, private brands have been growing across the CPG space and eating away at the share of established players.
I’d argue that Kimberly-Clark has long been a relatively low-risk business model; although the Kenvue acquisition adds new risks, the valuation of the stock, after the punishment incurred upon the acquisition announcement, seems to already price in more risk than normal…
Valuation
The P/E ratio has dropped to just 17.6.
That’s well below its own five-year average of 21.7.
The cash flow multiple of 10.6, which is low in absolute terms, is also far lower than its own five-year average of 15.1.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 4.5%.
I’m basically assuming something pretty close to the 10-year dividend growth rate persisting out into the future.
This doesn’t seem unreasonable to me, seeing as how the consistency of Kimberly-Clark has been remarkable.
The Kenvue acquisition, which I’m somewhat negative about, could lend itself to an acceleration in EPS and dividend growth (stemming from synergies and accretion).
But the debt and reduction in share buybacks are on the other side of that.
Balancing things out, looking at the totality of data, I view Kimberly-Clark as capable of delivering more mid-single-digit dividend growth over time, which would not be a herculean feat.
The DDM analysis gives me a fair value of $95.76.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
There’s been quite a bit of wood chopped on this stock’s valuation after the recent drop, although I’m not seeing any serious undervaluation being present.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates KMB as a 4-star stock, with a fair value estimate of $133.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates KMB as a 3-star “HOLD”, with a 12-month target price of $117.00.
Perhaps I was too cautious, but we’re all roughly in the same neighborhood here. Averaging he three numbers out gives us a final valuation of $115.25, which would indicate the stock is possibly 10% undervalued.
Bottom line: Kimberly-Clark Corp. (KMB) is a storied institution, running a simple business model predicated on tissue-based products. It’s worked well for more than 150 years, and I don’t see anything to indicate why it won’t work well for another 150 years. Although an upcoming acquisition introduces some question marks, multiple billion-dollar brands and the consumable nature of its everyday products are defensive. With a market-smashing yield, inflation-beating dividend growth, an acceptable payout ratio, more than 50 consecutive years of dividend increases, and the potential that shares are 10% undervalued, this Dividend Aristocrat and Dividend King is worthy of consideration for income-seeking dividend growth investors.
-Jason Fieber
Note from D&I: How safe is KMB‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 70. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, KMB‘s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in KMB.
