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Kimberly-Clark: A Dividend Analysis

May 26, 2014 | About:

The power of brand names can not be overstated. The benefit of having strong, well-liked brands is that a company can achieve much higher margins than the seller of a generic product because customers are willing to pay more for higher quality. Kimberly-Clark (NYSE:KMB) is an example of a company that owns such brands.

Strong brands are typically a hallmark of a dividend stock, providing stability and ensuring that the dividend is well supported. Kimberly-Clark owns brands like Kleenex, Cottonelle, Kotex, Depend, Huggies, and Pull-Ups, and the company sells its products in more than 175 countries. Is Kimberly-Clark a solid dividend stock at these prices?

The dividend

Kimberly-Clark pays an above-average dividend yield compared to both the S&P 500 and similar companies like Johnson & Johnson, Procter & Gamble, and Colgate-Palmolive.

On a 10-year annualized basis Kimberly-Clark has the lowest growth rate of the bunch, with Colgate having the highest. All of the companies except Colgate have slowed the dividend growth over the past five years, likely due to the financial crisis. But the interesting thing is that Kimberly-Clark's most recent dividend increase has more than fully recovered to the 10-year average. Colgate's most recent increase was significantly lower than either historical average, as was Procter & Gamble's. Johnson & Johnson's most recent increase was slightly higher than the five-year rate but far lower than the 10-year rate.

Now, this may not mean much since dividend growth can be choppy at times. Colgate, with a much lower yield than the other three stocks, isn't growing the dividend all that much faster based on any of the three metrics. Kimberly-Clark, Johnson & Johnson, and Procter & Gamble are all in a very similar boat. All three have yields around 3% and dividend growth around 9% - 11% annually. All three have similar payout ratios.

Kimberly-Clark has the highest yield of the three, and Procter & Gamble's yield is elevated due to a steep sell-off in April. Pre-sell-off P&G's yield was closer to 2.9%. How fast does Kimberly-Clark's dividend need to grow annually over the next decade for the stock to be fairly valued today?

Kimberly-Clark needs to grow its dividend by about 9.1% annually for the next decade for the stock to be fairly valued today. This is a bit less than its 10-year annualized growth rate and the most recent dividend increase, so if the future resembles the past the stock is roughly fairly valued. For comparison, Johnson & Johnson needs to see 9.55% annual dividend growth, Procter & Gamble needs 9.5% annual dividend growth, and Colgate needs 13.5% annual dividend growth.

The bottom line

Colgate is clearly overvalued, but the other three stocks are roughly fairly valued today. The required growth rate for all three are close to the historical values, and if the past is any indication of the future then the dividend should grow just fast enough to justify buying the stocks today. These three stocks are no bargains, however, and there are plenty of better options out there.

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