Kimberly-Clark is a global health and hygiene company with operations in 37 countries. It’s products are sold in more than 150 countries. It has a well-known family care and personal care brands such as Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex, Poise, and Depend. KMB’s corporate dossier shows various brands and products.
This section measures the trends for past 10 years of corporation’s revenue and profitability. The parameters should show consistent growth trends. The worksheet is at KMB stock analysis.
- Revenue: Increasing trend in revenue with average growth of 5.0% (4% standard deviation). If we remove 2002 drop, then the average growth is 6.2% (2.0%).
- Cash Flow and Income from operations: The trend is relatively flat with average growth rate of only 4% (18%). While the trend is flat, there is a very high variability in KMB’s ability to generate cash and income.
- EPS from continuing operation: The EPS also has a ‘relatively flat trend’ with average growth rate as 7.5% (16%). Most of the growth came in 2006.
- Dividend per share: Dividends per share are consistently growing for the last 10 years.
Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. I have discussed this in more detail at dividend tree. This is calculated as arithmetic average based on price, yield, EPS growth rate, payout factor, gross margin, operating margin, and financial leverage. The risk number for risk-to-dividends is 2.57. This is in high risk category as per my risk scale.
Quality of Dividends
This section measure the dividend growth rate, duration of growth, consistency over a period of past ten years.
- Dividend growth rate: The average dividend growth (8.9%) is higher than average EPS (7.6%). In addition, the EPS is less consistent compared dividends per share.
- Duration of dividend growth: There is continuously growing trends in dividends per share. The 10 year average growth rate is 8.9% (4.6%).
- 4 year rolling dividend growth rate for past ten years: It is less than 10% on 4 year rolling basis.
- Payout factor: Historically it has been less than 50%. However, since 2005 the payout factor has been above 50%.
- Dividend cash flow vs. income from MMA: Here, I am analyzing how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 4.7% (b) MMA yield is 3.4%. Considering historical average growth rate of 8.9%, the stocks dividend cash flow at the end of 10 years is 2.20 times MMA income. If we assume my expected growth rate of 4.6%, then the dividend cash flow is 1.53 time MMA income.
Fair Value Calculation
This sections determine the what price should I pay to buy a given stock
- Net present value (NPV) price based on 20 year DCF: $34.1
- Average high yield price calculated based on past 10 years: $61.3
- Pricing based on past 10 year relative price-to-earnings ratio. $64.6
- Pricing based on price-to-earnings ratio of 12: $42.6
- Graham number: $25.1
The range of fair value is calculated as $37.0 to $45.5. This determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).
The strength of KMB is that it has a diversified product portfolio with each business segment contributing 10% to 20% of the revenue. However, this analytical information of KMB shows quite a few red flags that are likely to affect future dividend growth. Putting this analysis in context of business environment, KMB’s growth and profitability is under pressure from locally branding products. The flat revenue, EPS, and cash flow trends are the reflection of the fact that demand for its products (personal care, household items, etc.) are stable, albeit not growing.
In next 3 to 5 years, the flexibility in payout factors and stability (or slow growth) in revenue/EPS provides enough room for maintaining the consistency is dividend. However, assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividends will be under pressure. Therefore, with next 8 to 10 year horizon, my expected dividend growth will be 4.6% with standard deviation of 4.5% (this is equal to the average growth in revenue).
The stocks risk-to-dividend number is 2.57 (high category) and at the same time, dividend cash flow is less than 2.0 times the MMA income based my expected dividend growth of 4.6%. The price of the stock will have to drop to $38.6 to have a cash flow to be 2.0 times the MMA income (and hence justify the high risk for dividend cash flow). This price of $38.6 is also very close to the low value of my fair value calculation. At the time of this writing, my dividend risk based allocation does now allow buying KMB. I will continue watching KMB for changes in its performance.