The one benefit of the washout that the market has experienced over the past several weeks is that many stocks are well off their 52-week highs. Of course, the worldwide economic disruption due to the coronavirus likely means many companies will have to reduce their expectations for the year. This makes attempting to estimate earnings an exercise in futility for nearly every sector of the economy. Investors won’t be able to grasp the full extent of the damage done to the economy due to the coronavirus until at least first-quarter earnings start to come out in mid- to late April.
There are some companies, however, that may be able to overcome the slowdown in the economy.
I feel that consumer staples giant Kimberly-Clark Corp. (KMB, Financial) is one such example.
Company background and why it is likely to maintain guidance
Kimberly-Clark is a global leader in multiple personal care product categories.
The company’s leading brands include Huggies, Pull-ups, Good-Nites, Kleenex, Scott, Cottonelle, Kotex and Depend, as well as workplace health and safety products like soaps, sanitizers and tissues. Kimberly-Clark holds a top spot in 80 countries around the world. The company trades with a market capitalization in excess of $46 billion.
Recent world events have caused many countries to put recommendations of social distancing in place due to the spread of the coronavirus. Some countries have placed total lockdown on its citizens in attempt to slow the spread of the virus. Many states, including the one I live in, have closed schools. On Sunday, Illinois and Ohio even closed restaurants, clubs and bars. This will be devastating to the local businesses, from mom-and-pop stores to large chains. The human tragedy due to the coronavirus is real as is the negative impact to the economy.
One of the few businesses that hasn’t been closed by the government in the areas hardest hit by the virus has been grocery stores and pharmacies. People still need to acquire food, medicines and other products for themselves and their families. If you have a social media account, it is highly likely that you’ve seen or heard about how quickly products, especially paper products like toilet paper and paper towels and sanitizers and soaps, have flown off the shelves. Diapers at the stores close to me have sold out by noon for the last week. Hand sanitizer continues to be one of the most sought after items in nearly every country, so much so that stores shelves are completely empty of the product.
The Centers for Disease Control and Prevention continues to recommend that people wash or sanitize their hands frequently during this period. Even with communities trying to isolate themselves, people still need their consumer goods products.
Toilet paper, tissues, diapers and sanitizers are products that consumers are most likely willing to leave their house for during this time. For these reasons, I believe Kimberly-Clark, with its portfolio of leading products is likely to navigate the economic disruption caused by the coronavirus quite well.
This should set the company up to build on a solid 2019.
Recent earnings results
Kimberly-Clark reported fourth-quarter and full-year 2019 earnings results on Jan. 23.
Quarterly revenue grew just 0.3% to $4.6 billion, which was $7 million higher than expected. For the year, revenue of $18.5 billion was flat. Kimberly-Clark managed to increase prices 2% during the quarter, while product mix added 1% to growth. Volumes were lower by 1% and currency exchange negatively impacted results by 2%.
Earnings of $1.71 per share for the quarter were 1 cent above estimates and a 7% improvement from the previous year. For 2019, Kimberly-Clark’s earnings grew 4.2% to $6.89. This may not seem that impressive, but the company has had some lean years over the last decade. For example, it posted declining earnings per share growth in 2011, 2014 and 2015.
Two things stood out to me about the most recent quarter. The first was Kimberly-Clark’s organic growth rate, which was 3% for the fourth quarter and 4% for the year. Full-year results were double the company’s original guidance for growth. The company saw organic growth in both domestic and international markets.
Source: Fourth-Quarter Earnings Results Presentation, slide 6
In North America, results for the consumer product improved 3% overall for 2019. Personal care sales were up 4% due to a combination of higher volumes, increased prices and improved product mix. Kimberly-Clark was able to raise prices and still not see a falloff in decline for this product category. That is a positive sign. Consumer tissue was up 2% overall. In this product category, Kimberly-Clark had 7% growth due to increased prices. Volumes fell 5%, showing that higher prices did have an impact on demand in this segment. K-C Professional sales improved 3% year over year, again due to higher prices.
Developing and emerging markets also demonstrated strength, showing organic growth of 6%. Personal care was strong in these regions, led by a 20% improvement in Eastern Europe. China, Brazil and South East Asia all posted high single-digit growth for 2019. Even Argentina, which has been a difficult market due to economic a slowdown, added 2.5% to growth.
Overall, pricing was a major benefit to Kimberly-Clark during 2019 as higher prices added 4% to growth. This was the highest benefit in 10 years for the company. Volumes only fell 1% as a result, showing that the company’s products remain in high demand among consumers even at higher price points. An improved product mix added 1% to results. The adjusted gross margin improved 180 basis points to 35%, while the adjusted operating margin increased 80 basis points to 17.8%. This shows that Kimberly-Clark’s business is churning out a higher percentage of profits than in the previous year.
Share repurchases also helped results. The company bought back at least $2 billion worth of stock for the ninth consecutive year. The share count has been reduced with a compound annual growth rate of 1.7% since 2010. Net profit has improved by 2.6% during this time. This does include steep declines in the middle of the last decade. Since 2015, net profit is up nearly 240% as the company has shown improvements in multiple areas of its business. For 2019, net profit grew 3.1%, 50 basis points above the decade long average growth rate, showing that Kimberly-Clark is a much stronger business today than in the past.
Dividend and valuation analysis
With a 3.9% dividend increase for the upcoming April 1 payment, Kimberly-Clark has now raised its dividend for 48 consecutive years. Two more years of dividend growth will earn the company Dividend King Status. There are currently just 30 companies in the U.S. that have achieved more than 50 years of dividend growth, but Kimberly-Clark looks poised to join this exclusive club in the very near future.
The company has increased its dividend with a compound annual growth rate of:
- 2.3% over the past three years.
- 3.1% over the past five years.
- 4.5% over the past 10 years.
The most recent increase is an improvement over the growth rate for the past three- and five-year periods. Shares offer a yield of 3.2% at the moment, which is in line with the stock’s five-year average yield.
Kimberly-Clark distributed $1.4 billion in dividends last year while generating free cash flow of $1.5 billion. Nearly every dollar of free cash flow was consumed by dividends, but this was mostly due to restructuring that the company began in 2018. The majority of workforce reductions are in place and the company should see improved cash flows for the current year. The free cash flow payout ratio averaged 61% for the previous three years, which is a much healthier ratio.
The company is expected to earn $7.30 this year. As I stated above, unlike many companies, I believe Kimberly-Clark will be able to maintain its guidance or produce something close to its guidance due to the run on products over the past few weeks.
For the sake of argument, let’s say the company only earns 80% of its original guidance, which would be $5.84 in earnings per share for 2020. Using the annualized dividend of $4.28, the payout ratio is 73%. This is nearly identical to the 10-year average payout ratio of 71%.
Shares of Kimberly-Clark are trading around $135 as I write this, giving the stock a forward price-earnings ratio of 23.1, above the 10-year average price-earnings ratio of 21.1. This is an elevated valuation, but the stock has held up remarkably well during the current environment, showing that investors believe the name to be a safe haven.
At current prices, Kimberly-Clark is just 9.5% off of its 52-week high. Compare this to the 30% decline, peak to trough, for the S&P 500, and the consumer staples company suddenly looks like an attractive asset to own even if the forward price-earnings ratio is higher than average.
Final thoughts
While markets remain in turmoil, investors should seek out names that have an advantage in the current environment. Kimberly-Clark likely will see solid results for at least the current quarter as consumers are stockpiling paper products and cleaning supplies. This gives the company a leg up on many other companies in the market and has helped the stock to hold up despite the impact of the coronavirus.
With nearly five decades of dividend growth and a decent yield, Kimberly-Clark should be especially attractive to income-oriented investors. Earnings per share may come up short, but the company should be in a better position than most others in the market due to how necessary its products are in the everyday lives of consumers.
The marketplace remains a challenge, but investors buying Kimberly-Clark today could do well given the company’s business and dividend history.
Author Disclosure: The author is not long Kimberly-Clark, but may initiate a position in the next 72 hours.
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