Company Description: Kimberly Clark Corp. is a global consumer products company producing tissue, personal care and health care products. Its brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex and Scott.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
KMB is trading at a premium to all four valuations above. The stock is trading at a 21.5% premium to its calculated fair value of $89.25. KMB did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
KMB earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. KMB earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1935 and has increased its dividend payments for 42 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $386 is below the $500 target I look for in a stock that has increased dividends as long as KMB has. The stock's current yield of 3.1% exceeds the 2.98% estimated 20-year average MMA rate.
Memberships and Peers: KMB is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The company's peer group includes: Procter & Gamble Co. (PG) with a 3.1% yield, Colgate-Palmolive Co. (CL) with a 2.2% yield, and Clorox Corporation (CLX) with a 3.0% yield.
Conclusion: KMB did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks KMB as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $100.40 before KMB's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 42 years of consecutive dividend increases. At that price the stock would yield 3.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.5%. This dividend growth rate is above the 3.7% used in this analysis, thus providing no margin of safety. KMB has a risk rating of 1.75 which classifies it as a Medium risk stock.
KMB enjoys stable demand for its household and personal care products. General economic conditions in developed markets has not improved significantly over the past several years. The company's large international presence remains exposed to unfavorable foreign currency translations. Future sales growth should be helped by expansion in non-traditional categories and emerging markets.
The healthcare segment has experienced slowing sales growth. In November 2013, the company announced plans to to divest its healthcare business and focus on its core consumer and professional brands. The healthcare business will be spun off as a separate publicly traded company named Halyard Health, Inc. and will trade with the symbol HYH. It will be headquartered in Alpharetta, GA, near Atlanta and have approximately $1.7 billion in annual sales. The spin off will likely close on Oct 31, 2014 with the new company beginning to trade on November 3rd.
The company's Free Cash Flow Payout at 57% (down from 62%) is slightly below my acceptable level of 60%. However, Debt to Total Capital at 59% (up from 54%) is well above the 45% maximum I look for. The company's last dividend increase of 3.7% was small compared to the 7.8% average over the previous 4 years. In addition, KMB is trading at a 21% premium to my calculated fair value of $89.25, so for now I will wait for a more opportune time before adding to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in KMB (2.3% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [KMB] [PG] [CL] [CLX]