- Kimberly-Clark has characteristics of a company suited for wealth preservation, portfolio diversification and a reliable dividend income.
- Management increased forward guidance in the latest earnings, restoring confidence in organic growth.
- Trading slightly below fair value, with price targets between US$155 and US$118 per share.
The consumer staples sector is slowly increasing market capitalization, and earnings are following close behind. Companies like the Kimberly-Clark Corporation (NYSE:KMB) have a product portfolio that allows them to gain consistent revenues. In this article, we will analyze the fundamental qualities of Kimberly-Clark and see how it reflects for investors in terms of dividends and value.
In order to get to Kimberly-Clark, we took some ques from the market. It seems that in the last 7 days, the U.S. market has lost some 6.5% of its value. However, the stocks that do show up as gainers, carry with them a stronger signal of fundamental quality, since they are the ones rising while most others are falling.
In the top-gainers list, we find that Kimberly-Clark managed to jump 8.4% in the last 7 days, which made us drill down on the consumer staples sector.
In the chart below, we can see that this sector has been consistently increasing earnings, and stock prices are growing close to the fundamentals. This gives us some indication that the sector is not overvalued, as it is trading close to the growth in earnings.
Analysts are also most optimistic on the Personal Products industry, and forecast an annual earnings growth rate of 13% over the next 5 years.
The industry in which Kimberly-Clark is located - Household Products - has an average PE of 26.7x and is expected to grow earnings by 6.6% annually over the next 5 years.
Now we will review the company, and see the fundamental characteristics after the latest earnings report.
Kimberly-Clark released the latest earnings report on the 22nd of April.
The company beat both earnings and revenue forecasts, with revenue of US$5.1b, some 3.6% above estimates, and statutory earnings per share (EPS) coming in at US$1.55, 30% ahead of expectations.
- Trailing 12-month sales were US$19.792b vs US$18.874b a year ago - up by 4.9%
- Trailing 12-month net income was US$1.753b vs US$2.276b a year ago - down by 23%
What seems to have motivated investors, is the increased guidance from management, pointing to a growth in sales of 4% to 6% (prior est. 3% to 4%), and a net sales increase between 2% to 4% (prior 1% to 2%).
Our forward income chart shows what analysts expect to see from the company in the next 3 years.
Following last week's earnings report, Kimberly-Clark's 15 analysts are forecasting 2022 revenues to be US$20.2b, approximately in line with the last 12 months.
Per-share earnings are expected to rise 9.5% to US$5.70. While net income is estimated to come at US$1.9b.
The company also has an 8.9% profit margin, while historical data reveals that margins were slightly higher in the past.
Finally, a point of concern seems to be the high debt to equity ratio, however a more appropriate measure of stockholder's equity is the market capitalization, which when used, brings the debt to market equity ratio to 20% - a fair percentage of capital for a stable and profitable company.
A low book value of equity, can distort return measures such as return on equity and return on capital employed, so investors may want to look at returns on total assets (10.7%), or profitability and growth measures as a better gauge to management efficiency.
Finally, we will put all of our findings into context for the value of Kimberly-Clark today.
Pricing and Value
We will utilize 3 metrics for our analysis: Forward PE, analyst price targets, and intrinsic value.
Forward Price to Earnings
The value of a stock today is a reflection of what it can earn in the future. That is why taking the estimated earnings next year, can give us a better approximation of the current pricing, which we can use to compare with other stocks in the same industry.
The forward PE for Kimberly-Clark is 25x, which implies that the company is close to fairly valued compared to the industry PE of 26.7x.
The analysts reconfirmed their price target of US$132, showing that the business is executing well and in line with expectations.
There's another way to think about price targets, and that's to look at the range of price targets put forward by analysts. The most optimistic Kimberly-Clark analyst has a price target of US$155 per share, while the most pessimistic values it at US$118.
We should be careful, as even though the company has great fundamental qualities, it seems to be a bit over what analysts expect it to be worth in the future. For investors that want to invest only once in the company, they should consider looking for an appropriate entry price, while for investors that intend to continuously invest, the current difference from the price target may not impact the outcome too much.
Our discounted cash flow model, attempts to derive the intrinsic value of the cash flows, by utilizing a set of assumptions about the future and analysts' forecasts.
Based on our DCF, it seems that Kimberly-Clark's intrinsic value is around US$80 billion, or $240 per share. Keep in mind that this is a general model and investors should do their own research before deciding on the value of a company.
A dividend analysis, should be able to demonstrate:
- If a stock pays a good/above average dividend in relation to the risk an investor is taking on
- If the dividend is affordable in the long term
- If there is any room for a dividend increase in the future
We can see that Kimberly-Clark's dividend is currently yielding 3.3%, which is higher than the 2.2% industry average.
Last year, the company paid out 88% of their earnings as dividend, implying that the dividend is on the margin of affordability, and growth is mostly expected to come from an increasing consumer demand, rather than from capital expenditure projects.
The company has been consistently increasing the divided per share over the years, which shows that management is dedicated to providing income to investors, however given that the company is in a mature phase, it might be hard to gain enough growth in the future and increases in the dividend per share may be less frequent.
Kimberly-Clark has the characteristics of a company suited for wealth preservation, portfolio diversification and a reliable dividend income. The company produces goods that are continuously needed by people and are not overwhelmingly affected by changes in purchasing power.
The company surprised investors with an increased forward guidance, restoring confidence in organic growth.
Kimberly-Clark pays a reliable dividend, currently above the industry average, but with limited growth potential
The stock is trading slightly under fair value according to the forward PE and intrinsic value model, and analysts' price targets set a range between US$155 and US$118 per share.
Keeping that in mind, we still think that the longer term trajectory of the business is much more important for investors to consider. We have estimates - from multiple Kimberly-Clark analysts - going out to 2024, and you can see them free on our platform here.
Even so, be aware that Kimberly-Clark is showing 2 warning signs in our investment analysis, you may want to explore.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.