Why Kimberly-Clark Will Do Well For The Rest Of The Bull Market - Kimberly-Clark Corporation (NYSE:KMB)

I believe the company will soar straight through them, thanks to a combination of momentum, high shareholder yield and above average fundamentals.

While dividend growth is too low to justify a long-term investment, investors will do well by holding the stock throughout the last stages of the bull market.

Only investors with no exposure to the consumer staples sector should consider initiating a position at current prices.

During the past 12 months, the consumer staples sector has outperformed the S&P 500. Amid ongoing trade war discussions, investors have become cautious, and have been shifting more capital into conservative, consumer good stocks. The chart below shows the performance of the SPDR select Consumer Staples fund (XLP) and of the S&P 500 (SPY).

The sector has outperformed the index by 5%, and many of the high quality consumer stocks now have great momentum. While I advise investors to hold many of their high quality consumer staples stocks, it is becoming tough to find new opportunities to deploy cash.

Kimberly-Clark (KMB) is one company that has benefited from the rise of consumer staples.

Kimberly-Clark Corporation has a dividend yield of 3.01% & trades around $137.06. My M.A.D Assessment gives KMB a Dividend Strength score of 73 and a Stock Strength score of 88.

I believe that dividend investors should avoid Kimberly-Clark Corporation at current prices, but that current investors should hold and ride the company’s positive momentum.

Kimberly-Clark Corp is engaged in the manufacturing and marketing of a range of products made from natural or synthetic fibers using technologies in fibers, non-wovens, and absorbency. Its segments include personal care, consumer tissue, and K-C professional.

This article will analyze KMB’s potential as an income-producing investment and will then analyze the stock’s potential for capital appreciation.

KMB yields 3%. For a 3% yielder to make its way into my portfolio, it needs to have good dividend growth potential, ideally in the high single digit to low double digit range. For a mature business like KMB, this means that payout ratios would need to be relatively low to afford dividend growth in upcoming years.

Right off the bat, we notice that KMB’s dividend payout ratios are higher than a lot of dividend stocks.

79% of Kimberly-Clark Corporation's earnings are paid out as dividends. This is a more attractive payout ratio than 22% of dividend stocks.

KMB pays 51% of its operating cashflow as a dividend, putting it ahead of 21% of dividend stocks.

Kimberly-Clark Corporation has a free cashflow payout ratio of 94%, a better ratio than 22% of dividend stocks.

While the company generates sufficient cash to pay its dividend, there isn’t much room left for non-organic dividend growth. The fact that the company’s dividend eats up nearly all of the company’s free cashflow isn’t great either, since it reduces the company’s flexibility, as well as its ability to use excess cash elsewhere when needed.

On the other hand, KMB can pay its interest 10 times, which is better than 74% of stocks. This level of coverage can be considered comforting given the high payout ratios.

Looking at payout and coverage ratios together would suggest that KMB’s dividend is relatively safe. Given the company’s deep roots in many markets, it seems unlikely that the dividend will be cut. However, the dividend is now at a level where it uses nearly all the company’s free cashflow.

KMB’s dividend yield took a nose dive from just below 4% to just above 3% in the course of 12 months, as the price took off.

Kimberly-Clark Corporation's dividend yield of 3.01% is better than 66% of dividend stocks. This isn’t an unusual yield for KMB, and is in line with its historical average. As recently as April 2016 it has yielded as little as 2.58%.

This last year, the dividend grew 3% which is slightly lower than their 5 year CAGR of 4%.

And this is where I take issue with KMB. For a stock offering a 3% yield, its dividend growth rate is super low. A 4% CAGR would be acceptable for a stock yielding more than 4%, but for a 3% yielder, it is unlikely that the dividend will contribute significantly to total returns in upcoming years.

Over the previous 3 years, Kimberly-Clark Corporation has seen its revenues remain flat while net income grew at a 18% CAGR.

Nonetheless, the company’s profits remain highly impacted by currency movements and commodity prices. During the first quarter, despite organic sales being up 3%, total sales were down 2% YoY due to currency drag.

Because of the lackluster revenue growth, the already high payout ratio, the company has been forced to increase its dividend at a super low rate. I doubt future dividend growth potential will exceed 3-4% dividend growth per annum, and therefore cannot invest in KMB at current prices.

The combination of the data presented above gives KMB a dividend strength score of 73 / 100. Without a doubt, this century old company’s dividend is safe for upcoming years. However, as the business continues to grow only at low single digit rates, investors can’t expect the dividend to grow any faster. This wouldn’t matter as much if the stock yielded more than 4%, but at 3% this low level of dividend growth just isn’t sufficient.

If I can’t initiate a position in KMB because of the low dividend growth, what should current investors do with their shares? To answer this question, I will assess the company’s potential for capital appreciation by focusing on four key factors: value, momentum, financial strength and earnings quality.

The concern around many consumer staples stocks is that they are now becoming overvalued. It is becoming more and more common to hear investors ask questions such as:

“How can a diaper company with close to no growth trade at the same multiples as top tech firms such as Alphabet (GOOGL) or Microsoft (MSFT)?”

And it’s a good question. When I assess value, I look at several multiples, as well as shareholder yields. I then compare these values to over 3,000 U.S. stocks, and assess how relatively undervalued or overvalued the stock is.

These values would suggest that KMB is more undervalued than 64% of stocks, which is sufficient. Compared to the two tech stocks above, which have value scores of 43 and 38, respectively, KMB comes out ahead thanks to its generous 6% shareholder yield.

And this is where the value of large stable “widow and orphan” consumer stocks comes from: the shareholder yield. The combination of buybacks and dividends contributes significantly to a stock's total returns. In times of turmoil, they provide some certainty.

The chart above suggests that KMB is trading just shy of its 5 year average PE, although it also suggests it is somewhat above its median PE. On good momentum, there would be no reason why the stock couldn’t climb and reach 30x PE by the end of the year, an 11% increase from current prices.

Kimberly-Clark Corporation' price has increased 12.42% these last 3 months, 20.87% these last 6 months & 28.27% these last 12 months and now currently sits at $137.06.

KMB has beaten both the S&P 500 and its sector during the last 12 months. It has better momentum than 85% of stocks, which I find to be encouraging. It is leading its sector, has the wind in its back, and as a

KMB has negative gearing, rendering analysis of the ratio impossible. Kimberly-Clark Corporation's liabilities have increased by 3% this last year. Operating cashflow can cover 17.7% of KMB's liabilities.

These ratios would suggest that Kimberly-Clark Corporation has better financial strength than 52% of stocks. Liabilities have grown in line with organic sales which is reasonable. What is remarkable is the high level of liability coverage. The company generates significant amounts of cashflow, which boosts its financial strength.

Finally, earnings quality is assessed to identify whether accretive or dilutive forces will influence EPS in upcoming years.

Kimberly-Clark Corporation’s Total Accruals to Assets ratio of -12.8% puts it ahead of 65% of stocks. 90.1% of KMB's capital expenditure is depreciated each year, which is better than 39% of stocks. Each dollar of KMB's assets generates $1.2 of revenue, putting it ahead of 82% of stocks. Based on these findings, KMB has higher earnings quality than 78% of stocks.

The company has a highly efficient asset base, which should be appreciated by investors. Furthermore the negative accruals should be accretive to earnings in upcoming years, while the levels of depreciation should have close to no impact.

When combining the different factors of the stocks profile, we get a stock strength score of 88 / 100 which suggests that KMB is in a good position to outperform.

Its combination of momentum, relative value, high shareholder yield and above average fundamentals, makes it a stock well worth holding throughout the last stages of the bull market.

With a dividend strength score of 73 & a stock strength of 88, KMB isn’t a great choice for dividend investors looking to initiate a position for long term dividend income. However, the stock’s factors indicate that it will likely continue to outperform during the next few quarters, and investors with no exposure to the consumer staples sector could consider KMB as a safe haven in times of turmoil.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seekingalpha.com

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