Kimberly-Clark for the Long Run
by: World's Best Stocks October 04, 2010
According to the press release of July 23, 2010 related to the Q2 2010 earnings of the company, Kimberly-Clark Corporation (KMB) expects EPS for the fiscal year 2010 in a range of $4.57 to $4.77. We take this opportunity to analyze the past of KMB in order to figure where the value of the stock could be in 10 years.
KMB the Corporation is a global company focused on a better life through product innovation and building its personal care, consumer tissue, K-C Professional & Other and health care brands. The Corporation is principally engaged in the manufacturing and marketing of a wide range of essential products to improve people's day-to-day lives around the world.
At $65.03, KMB is trading at 11.22% from its all-time high of $73.25 reached on December 4, 2000. Approximately 10 years after the stock hit its all-time high, it’s still possible to invest in the stock at an 11% discount from that top. In a more recent past, the stock reached another peak of $72.79 on June 5, 2007, meaning the stock is trading today at 10.66% from that level.
KMB is not a volatile stock. A non-volatile stock doesn’t necessarily mean bad returns for the investor and/or no enrichment. The volatility of KMB is measured by its beta ratio of only 0.44, which signifies that the stock has a theoretical volatility 56% lower than the market.
We compared the return of KMB with the market (SPY) from the years 1994 to 2010 YTD (as of October 1). All paid dividends are included in the return but not the 2 spin-offs made by KMB over that period.
Civil year
Kimberly-Clark Corporation
Market (SPY)
1994
4,18%
0.33%
1995
73.13%
37.71%
1996
20.17%
22.35%
1997
7.65%
33.35%
1998
14.94%
28.49%
1999
24.26%
20.32%
2000
10.32%
-9.70%
2001
-13.84%
-11.78%
2002
-18.65%
-21.54%
2003
27.26%
27.88%
2004
13.98%
10.54%
2005
-6.70%
4.70%
2006
17.13%
15.61%
2007
5.11%
5.16%
2008
-20.67%
-36.38%
2009
25.31%
26.05%
2010 (as of October 1)
5.09%
4.28%
An investment made in KMB on December 31, 1993 had a return of 298.95% on October 1, 2010, while an investment in the market (SPY), for that same period, had a return of 210.23%. If we look at the last 10 years, an investment made in KMB on December 31, 1999 had a return of 28.47% on October 1, 2010, while an investment in the market, for that same period, had a return of -7.12%. Again, all the paid dividends are included in these returns but not the 2 spin-offs made by KMB.
As you can see, over the 17 periods observed, KMB outperformed the market 6 times. Despite the fact that KMB and the market are far from having the same theoretical volatility, they had similar return per year (+/- 3%) 8 times over 17 periods. KMB underperformed the market only 3 times.
Let’s have a look at the past EPS, dividend per share and payout ratio of KMB in the first table and at the dividend growth in the second one. (All amounts are split adjusted for the 2-for-1 stock split of April 3, 1997 and the 2-for-1 stock split of January 3, 1992)
Year
Diluted EPS
Dividend per share
Payout Ratio
1991
$0.79
$0.725
91.77%
1992
$0.27
$0.82
303.70%
1993
$0.42
$0.84
200.00%
1994
$1.36
$0.875
64.34%
1995
$0.06
$0.895
1491.67%
1996
$2.48
$0.915
36.90%
1997
$1.61
$0.95
59.01%
1998
$2.11
$0.99
46.92%
1999
$3.11
$1.03
33.12%
2000
$3.31
$1.07
32.33%
2001
$3.05
$1.11
36.39%
2002
$3.22
$1.18
36.65%
2003
$3.33
$1.32
39.64%
2004
$3.61
$1.54
42.66%
2005
$3.28
$1.75
53.35%
2006
$3.25
$1.92
59.08%
2007
$4.09
$2.08
50.86%
2008
$4.04
$2.27
56.19%
2009
$4.52
$2.38
52.65%
2010
$4.67 (estimated)
$2.58
53.73% (TTM)
Year
Dividend growth
1991 to 1992
13.10%
1992 to 1993
2.44%
1993 to 1994
4.17%
1994 to 1995
2.29%
1995 to 1996
2.23%
1996 to 1997
3.83%
1997 to 1998
4.21%
1998 to 1999
4.04%
1999 to 2000
3.88%
2000 to 2001
3.74%
2001 to 2002
6.31%
2002 to 2003
11.86%
2003 to 2004
16.67%
2004 to 2005
13.64%
2005 to 2006
9.71%
2006 to 2007
8.33%
2007 to 2008
9.13%
2008 to 2009
4.85%
2009 to 2010
8.40%
The 2010 estimated EPS of $4.67 reflects the middle of the guidance of the company for the full year, which is $4.57 to $4.77 per share, after adjustments for the one-time charge related to adoption of highly inflationary accounting in Venezuela.
From 1996 to 2010 (2010 estimated), the compound annual growth rate was 4.62% for the company’s EPS. If we take 1991 as a starting year, the company increased its dividend each year since 1991. The compound annual growth rate of dividend of KMB has been 6.91% from 1991 to 2010 and in a more recent past, 8.70% from 1999 to 2010, which is excellent.
The average payout ratio for the years 1996 to 2010 has been 45.97%. We can clearly see an uptrend in the payout ratio of the company, which matches the fact that the company increased its dividend at a higher rate than its EPS growth rate over the last 10 years. At this rhythm, the payout should continue to increase.
With an annual dividend of $2.64, a TTM EPS of $4.69, a payout ratio of 53.73%, the company has flexibility to increase the dividend and this one is safe. The current yield of KMB is 4.06% while the current yield of the market is 1.92%.
As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year over year to ensure their long term potential growth. Here are the Kimberly-Clark Corporation’s sales by year from 1991 to 2009. We have also included 2010 TTM.
Year
Sales
1991
$11,627,900,000
1992
$12,024,200,000
1993
$11,646,800,000
1994
$11,979,200,000
1995
$13,788,600,000
1996
$13,149,100,000
1997
$12,546,600,000
1998
$12,297,800,000
1999
$13,006,800,000
2000
$13,982,000,000
2001
$14,524,400,000
2002
$13,566,300,000
2003
$14,348,000,000
2004
$15,083,200,000
2005
$15,902,600,000
2006
$16,746,900,000
2007
$18,266,000,000
2008
$19,415,000,000
2009
$19,115,000,000
2010 TTM
$19,587,000,000
The compound annual growth rate of the sales of KMB has been 2.80% over the period 1991-2009. This is not an impressive annual growth rate but if we analyze the sales by geographic area since 1995, we can clearly see an encouraging trend: The proportion of the sales of KMB coming from foreign markets increased over time comparing to the sales coming from US & Canada. In 1995, the sales from foreign markets accounted for 28.89% of the total sales of the company, while in 2009, the sales from foreign markets accounted for 45.49% of the total sales. The company will profit from the growing emerging markets.
Here, you will find a table of Kimberly-Clark Corporation’s sales by geographic area.
Geographic Area
2009
2005
2000
1995
North America (US & Canada)
54.51%
58.83%
67.06%
71.11%
Europe, Asia, Latin America & Other
45.49%
41.17%
32.94%
28.89%
Let’s have a look at the historic P/E of KMB.
Year
P/E at year-end
1991
25.97
1992
91.09
1993
53.25
1994
16.49
1995
632.17
1996
18.01
1997
29.27
1998
25.20
1999
20.92
2000
21.36
2001
19.61
2002
14.74
2003
17.74
2004
18.23
2005
18.19
2006
20.91
2007
16.95
2008
13.05
2009
14.10
2010 YTD
13.87 (TTM)
The current TTM P/E of KMB is 13.87. Over the period 1996-2010 YTD, we have 15 periods of P/E with an average of 18.81. We can clearly see over the period that the P/E of KMB is not necessarily constant and the trend is downwards. The actual TTM P/E is well below the average of 18.81 but it is not a sign that the stock is cheap because the company has evolved in the past decade to become a more mature company that focuses on the dividend payments for its shareholders. Usually, income stocks have lower P/E than growth stocks.
For the measure of the profitability, KMB has a TTM profit margin of 10.56%. The TTM operating margin is 15.13%. By comparison, the average TTM profit margin and TTM operating margin for the Household & Personal Products industry (4 companies compared; KMB, CL, PG, and CLX) are 12.30% and 18.98% respectively. KMB is below the industry.
For the measure of the financial strength, the MRQ current ratio is 1.03 for KMB. The company has a MRQ debt/equity ratio of 1.12. The average MRQ current ratio of the Household & Personal Products industry (4 companies compared; KMB, CL, PG, and CLX) is 0.94. KMB is above.
The better way to predict the future is to look at the past; this is why we analyzed the past of KMB. Now, we will use the past to extrapolate what would be the return in 10 years of an investment made in KMB today.
We previously saw that from 1996 to 2010 (2010 estimated), the compound annual growth rate has been 4.62% for the company’s EPS. The compound annual growth rate for the company’s dividend has been 6.91% from 1991 to 2010. In a more recent past, the compound annual growth rate for the company’s dividend has been 8.70% for the period 1999-2010. For our scenario, let’s presume that the company will grow its EPS by 4% and continue to increase its dividend by 7% per year in the next 10 years.
Year
Estimated EPS (growth of 4%)
Estimated dividend (growth of 7%)
2010
$4.67 (estimated)
$2.58 (already paid)
2011
$4.86
$2.76
2012
$5.05
$2.95
2013
$5.25
$3.16
2014
$5.46
$3.38
2015
$5.68
$3.62
2016
$5.91
$3.87
2017
$6.14
$4.14
2018
$6.39
$4.43
2019
$6.65
$4.74
2020
$6.91
$5.08
The investor who invests in KMB could pocket an estimated income of dividend of $38.13 until December 31, 2020 assuming a 7% growth of the dividend of the company per year. Here are 2 possibilities of the value of the stock price at the end of 2020, assuming different P/E ratios based on an EPS growth of 4% per year and an investment in KMB based on the current price of $65.03.
With a P/E of 12: EPS of $6.91 X 12=$82.92;
Return: 86.14% (paid dividends included) (Compound annual return of 6.41%)
With a P/E of 14: EPS of $6.91 X 14=$96.74;
Return: 107.40% (paid dividends included) (Compound annual return of 7.56%)
Based on a dividend in 2020 of $5.08 and an EPS of $6.91, that would give the company a payout ratio of 73.52% and a yield of 5.25% to 6.13%, assuming our 2 P/E scenarios of 14 and 12 (stock price in 2020 of $96.74 or $82.92).
In order to justify our valuation scenarios, we analyzed today’s 5 mature companies with high payout ratios to check if their current P/E and their current yield match our future expectations for the valuation of KMB.
Company
Payout Ratio
P/E TTM (As of October 1, 2010)
Yield (As of October 1, 2010)
AT&T, Inc. (T)
77.21%
13.40
5.83%
American Electric Power Co., Inc. (AEP)
68.18%
14.97
4.64%
Consolidated Edison, Inc. (ED)
70.12%
14.30
4.92%
Altria Group, Inc. (MO)
83.13%
14.33
6.39%
Lorillard, Inc. (LO)
64.62%
12.93
5.62%
Even if these companies are mature, they have current P/E in the range of 13 to 15, and current yield between 4.64% and 6.39%. After this analysis, we feel comfortable with our scenarios of P/E between 12 and 14, even if the company has a high payout in the future.
The fundamentals of the company are all great: low volatility, the stock is trading at 11.22% from its all time high of $73.25, excellent past return of the stock compared to the market, current yield at 4.06%, safe and rising dividend, growing EPS at anticipated records levels, growing sales on a long period with a higher proportion coming from foreign markets and finally, correct P/E.
Moreover, assuming our scenario of the growth rate of the company’s EPS and dividend for the coming years, the potential return would be in the range of 86.14% to 107.40% by the end of 2020 (compound annual return of 6.41% to 7.56%). Finally, assuming an annual dividend of $5.08 in 2020, the yield of the investor who invested in the stock at $65.03 would be 7.81% at that moment and should continue to increase over time: that is the reward of long term investing.
Participating in the revenues of companies who surround us in our everyday lifestyle is an excellent investing philosophy, and KMB is an excellent option in that matter.
Source for industry group and company description: Morningstar, Inc.
