I bought stock in Kimberly Clark (KMB) this week as a new Income investment at a 3.2% dividend yield. Kimberly Clark is a global consumer products company with many recognizable brands used by a quarter of the world’s population in the paper products space. Some of their top brands include Huggies, Klenex, Cottonelle, Kotex, Depend and Poise. It doesn’t get much more boring than toilet paper and diapers… and that’s what I love about Kimberly Clark. It’s a simple business model that is extremely stable yet continually earns a strong return on invested capital and returns Free Cash Flow to shareholders. When we’re investing in stocks for income, that’s exactly what we want: boring, stable, cash flow producing machines.
Kimberly Clark has been run by Thomas Falk since 2003. I think he’s one of the best under-the-radar CEO’s there is. The stock has cooled off the past couple of years from currency and pricing pressures but I’ve admired the job Falk has done to lead KMB through this period and I now think the company is poised for greener pastures ahead. He has reduced expenses through more efficient operations and has still been able to invest in new products to stay ahead of competitors.
Valuation
Sales growth has gone stagnant for the past 5 years but they’ve been able to maintain profit growth through improved margins (cutting expenses). Over the last 20 years, KMB has been able to grow profits at a compounded annual rate of 4%. Assuming, profit growth drops to just 3% per year, I think the stock is worth somewhere around $160 – a little over 30% higher than the current price. This should provide a nice margin of safety while we sit back and collect the dividend income.
I think KMB is largely through its sales rough patch for two reasons. First, I think we’ll see business from emerging markets start to pick up as currency pressures ease (EM makes up roughly 30% of sales). Second, the demographics in the developed nations look very attractive over the next 10+ years for a maker of diapers. Aging demographics is leading to growth for adult incontinence products and the millennials are now reaching the point (after waiting longer than usual) where birth rates are picking up. If sales start to tick higher, the leverage from a leaner cost structure will lead to much higher profit growth than we’ve seen over the past 5 to 10 years.
Capital Return
Under Falk’s reign as CEO, KMB has paid out over $13.5 billion in dividends and repurchased over $15.5 billion of stock (against a current market cap of $42 billion). We’re able to earn a total shareholder yield of around 5% per year through dividends and share repurchases, which is pretty impressive. With a 5% shareholder yield, the company only needs to grow around 3%-4% per year to average a very solid total return over time.
The company has increased the dividend each year for the past 44 straight, boosting it by an average annual growth rate of 6.6% over the last 10. KMB currently pays out less than 60% of FCF each year as dividends so this leaves plenty of room for future dividend increases.
Summary
Kimberly Clark has continually been a model of efficiency, generating strong returns and large amounts of excess cash flow that they return to shareholders year after year. I think the market is currently underestimating KMB’s future growth. This provides us with an attractive buying opportunity in a company with a stellar track record and bright outlook. Sometimes boring and simple is best for long-term investing.
Thanks for following!
-Nick
*all slides from KMB’s latest investor presentation