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Invest for dividends at Kimberly-Clark Corporation(KMB) – The safe retirement

Kimberly-Clark Corporation, together with its subsidiaries, manufactures and markets personal care and consumer tissue products worldwide. The Personal Care segment offers disposable diapers, training and youth pants, swim pants, baby wipes, feminine and incontinence care products, and other related products under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Sweety, Kotex, U by Kotex, Intimus, Depend, Plenitud, Softex, Poise, and other brand names.

As Warren Buffett says in a very famous interview of his: „We try to buy businesses where no matter who comes along, they got this durable competitive advantages!” KMB is one of these key companies. The products they produce will never go out of business and we never will stop using those products.

From a dividend standpoint…

Kimberly Clark pays and grows its dividends since 1972. Straight 49 years with no cut and raise every year. The current div. yield is 3.37% which is a decent yield in my opinion. The last year they raised their dividends 6.5% and they are raising it every year always at this level. 

 If you want your first stake from this bluechip company then you can buy it right now before 9. December is the Ex-dividend date. You have to own shares in the company before the Ex-dividend date and after that usually one month when you will get paid.

 The current payout ratio is 73%. I like to see this ratio under 75%; in this way, the company can manage their dividend payouts and will be less likely to cut. The current ratio is a little high but I’m not worried about it because over decades this ratio was always between 50-60%, so it will return in the future. The current div. yield is right in the middle compared to the last 10 years so it can be a decent buy. 

 Compearing the last 20 years you outperformed the S&P 500 by 51% on the dividend side.

 Share buybacks can be a silent killer. If the company does not buy back shares but dilute them then your investments are worthless over time. KMB wins also this measurement because they are buying back shares. Not in big amounts but they are doing it at least.

Current situation and past performance…

Despite covid, 2020 was the best financial year in the company’s history. 

Unfortunately over the last decade, the companies revenue stayed flat and barely beat inflation for example. However the operating and net income has grown year over year. This is very slow in my opinion, we saw in the dividend section that the company is any good only because of the dividends but this chart shows you that the stock price was able to grow and the total annual return is 5.7%. The total return on my investment over the last 20 years would be 215.1% which is not bad but we didn’t beat the S&P 500. On the dividend side, yes, but the return on my investment fell behind by 53%.

Since February of 2012, the market likes to put a premium valuation on this company. The orange line is the line where you should buy the stock or under it with a good margin of safety. As you can see since the date I mentioned the price(black line) was always above the orange line.

Forecasting, future growth

The future does not look good for a growth investor. Based on 17 analysts the estimated future growth rate is negative or below 1%. Analysts have a scorecard also which tells me that they are 100% right about the estimates of this particular company.

Fair value

I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.

  • (Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $20.473 + $55.319 = $75.792
  • Equity Value per Share (USD) = Total value / Shares Outstanding = $75.792 / 337 = $225.09)
  • Undervalued by 39.9%. The current fair value is $225.09.

Risks and overall takeaway…

The single biggest risk to the profitability of their business is the price of the commodity, inflation has significantly increased production costs, plus decreasing the profitability of their business. Mostly they are relying on the cost of pulp. 

Secondly, they have an 80% long-term debt/cap ratio. They are paying down debt every year but not in big amounts.

In my opinion, KMB is a very strong company and stable, less likely to go out of business soon but I wouldn’t consider adding this to my portfolio if I’m a growth and dividend investor together. I don’t see any major growth potential in it. If you want to live off dividends and you want to make sure that your money is in safe hands then go for it and buy some share of KMB but also in this case I wouldn’t make it bigger than 3% of my portfolio.

Disclosure: I have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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