When discussing my investment goals for 2021, I stated that I wanted to focus capital on companies that were producing better than expected financial results, providing higher than expected guidance, growing dividends at an above average clip and trading below the long-term average valuation.
One company that just checked all of these boxes is Kimberly-Clark Corporation (KMB, Financial). Because the company met many of my criteria for purchase, my wife and I recently added to our position at $136.89. Let's review the company's most recent quarter to see why.
Recent earnings results
Kimberly-Clark reported fourth quarter and full year earnings results on Jan. 25. The company's revenue for the quarter grew 5.7% year-over-year to $4.8 billion, which topped Wall Street analysts' estimates by $110 million. Adjusted earnings per share declined 1.2% from the previous year, but came in $0.07 ahead of expectations.
For the year, revenue improved 4% to $19.1 billion. Adjusted EPS increased 12.3% to $7.50, which was higher than the company's guidance of $7.10 to $7.60.
For the quarter, volumes improved 3% while pricing and product mix each added 1% to results. Net income was down 10% due to a combination of headwinds from currency exchange, an increase in manufacturing costs, higher advertising spending and raw materials inflation.
By segment, the Consumer Tissue segment grew 14% to $1.7 billion and Personal Care improved 5% to $2.3 billion while K-C Professional fell 9% to $0.7 billion. Growth for Consumer Tissue and Personal Care were an acceleration from the most recent quarter and represented the best year-over-year gains of 2020.
By region, North American sales grew 3%, mostly due to higher volumes. The Consumer Tissue segment was especially strong with sales growing 21% as bathroom tissue and paper towels posted double-digit growth. Facial tissue was higher by mid-single digits. Personal Care was up double-digits due to higher demand for adult care, feminine care and baby and child care products. Huggies diapers and GoodNites youth pants enjoyed expanded market share. K-C Professional, though the segment was down overall, actually grew 5% on strength in wipers and safety in this region.
It was developing and emerging markets where Kimberly-Clark really stood out as revenues grew 7% in these regions. The company's recent purchase of Softex Indonesia added 8% to revenues, a stout debut for the acquisition's debut. What I found to be especially positive was the company's continued volume growth in the key markets of China, India and Brazil. These areas will likely be sources of growth for Kimberly-Clark going forward as they expand their market share. Partially offsetting these gains was a 9% unfavorable impact from currency exchange.
Consumer Tissue was down 2% in these regions, but this was mostly due to a 6% drag from currency exchange rates. Volumes were up 3%. Personal Care fell 7%. Again, currency was an issue, reducing revenues by 9%. K-C Professional was extremely weak as sales decreased 21% with all major countries seeing declines. The washroom product lines were hit especially hard by Covid-19.
Developed markets outside of the U.S, which includes Australia, South Korea and Western/Central Europe, were higher by 6%. Currency exchange was actually a 5% benefit to results. Volume growth of 2% was offset by lower net selling prices and product mix. Consumer Tissue had sales growth of 12%, evenly split between higher volumes and currency exchange tailwinds. Personal Care was higher by 6%, mostly due to strength in China, India and South Africa. K-C Professional was down 2% as increases in pricing and favorable currency exchange wasn't enough to offset double-digit declines in volumes.
Companywide organic growth grew 5% and 6% for the quarter and year, respectively. Organic growth actually came in ahead of the company's estimates of 4% to 5% for the year following third quarter results.
Shares of Kimberly-Clark had retreated following the last quarter as investors took guidance to mean that much of the benefit from Covid-19 had already occurred. This was a reasonable reaction at the time given that Kimberly-Clark had seen solid growth rates in its two largest businesses, but the fourth quarter's results were the best of the year.
Overall, the quarter and 2020 were pretty good for Kimberly-Clark. The company increased or maintained market share in approximately 60% of its 80-product category and country combinations. Adjusted operating margin grew 110 basis points to 18.7% while adjusted gross margins were up 210 basis points to 37.1%. Full year cash from operation grew 36% to $3.7 billion and the company repurchased 4.9 million shares.
Kimberly-Clark announced a 6.5% dividend increase, marking the 49th consecutive year that the company has raised its dividend. The company has increased its dividend with a compound annual growth rate of 4.5% over the last decade. At the same time, the company authorized a new $5 billion share repurchase program in addition to the current $5 billion authorization that is expected to be completed before the end of the year. I consider Kimberly-Clark to be one of the more shareholder friendly companies and the dividend increase and share repurchase authorization support this.
Guidance
Kimberly-Clark believes that much of the gains made in 2020 will continue into 2021. Net sales are projected to increase 4% to 6% with organic growth in a range of 1% to 2%. The expected organic growth rate is lower than what the company produced in 2020, but still solid consider the higher comparable base that Kimberly-Clark faces in the coming year.
The company also expects adjusted EPS in a range of $7.75 to $8.00 for 2021. For context, analysts surveyed by Yahoo Finance expect that the company will earn $7.78 in 2021.
Using our purchase price and the midpoint for expected EPS for the year, shares traded with a forward price-earnings ratio of 17.4. The stock has an average price-earnings ratio of 21.1 over the past decade.
Final thoughts
The fourth quarter showed an accelerated growth rate for Consumer Tissue, and Personal Care returned to mid-single-digit growth. The company's K-C Professional business was weak, but this is mostly due to weaker demand for products, especially in the washroom product line. Fortunately, this is the smallest business within the company. Kimberly-Clark does expect organic growth in 2021, which is excellent news due to the relatively high rates that were seen in 2020.
While the stock declined following a tempered outlook at the time of the third quarter, the company's results were well received by the market this time around as the stock climbed as much as 6.6% following the earnings release.
Kimberly-Clark topped estimates in the fourth quarter, provided guidance above consensus estimates for the current year, announced a higher than usual dividend increase and shares trade with a lower than average forward price-earnings ratio. For these reasons, we felt comfortable adding to our position in the company.
Author disclosure: the author maintains a long position in Kimberly-Clark.
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