Thursday, November 5, 2009

Kimberly-Clark : Stock Analysis for Dividend Portfolio

Kimberly-Clark is a global health and hygiene company with operations in 37 countries. It’s products are sold in more than 150 countries. It has a well-known family care and personal care brands such as Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex, Poise, and Depend.

KMB is a dividend aristocrat and member of Mergent’s Broad Dividend Achievers index. I last reviewed KMB in February 2009 (without its 2008 results). At that point in time, it was high risk to dividend stocks. I have made an observation that its dividends would be under pressure. This 2009 dividend growth rate was only 3.4%, which is lower than its historical average of 9.4%. I am reviewing this again for risk to dividends.

Trend Analysis
This section measures the trends for past 10 years of corporation’s revenue and profitability. The parameters should show consistent growth trends. The chart below shows these trends.

  • Revenue: Increasing trend in revenue with average growth of 4.6% (4% std. dev.)
  • Cash Flow from operations: The trend is relatively flat for last few years. The free cash flow is also flat for last few years.
  • EPS from continuing operation: The EPS also has a ‘relatively flat trend’ with average growth rate as 3.5% (10.84%). It has had negative EPS growth for three years out of past four years.
  • Dividend per share: Dividends per share are consistently growing for the last 10 years.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.43. This is in high risk category as per my risk scale. Reducing gross and operating margin, negative EPS growth rate, and increasing payout factor makes it a high risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

  • Dividend growth rate: The average dividend growth (9.4%) is higher than average EPS (3.5%). In addition, the EPS is less consistent compared dividends per share.
  • Duration of dividend growth: There is continuously growing trends in dividends per share. The 10 year average growth rate is 9.4% (4.6%). The latest dividend growth rate was only 3.4%.
  • 4 year rolling dividend growth rate for past ten years: It is less than 10%.
  • Payout factor: Historically it has been less than 50%. However, since 2005 the payout factor has been above 50%.
  • Dividend cash flow vs. income from MMA: Here, I am analyzing how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.83% (b) MMA yield is 2.9%. Considering historical average growth rate of 9.4%, the stocks dividend cash flow at the end of 10 years is 2.2 times MMA income. If we consider my expected growth rate of 4.1%, then the dividend cash flow is 1.47 times MMA income.

Fair Value Calculation
This sections determine the what price should I pay to buy a given stock

  • Net present value (NPV) price based on 15 year DCF: $34.9
  • Average high yield price calculated based on past 10 years: $60.8
  • Pricing based on past 10 year relative price-to-earnings ratio. $48.9
  • Pricing based on price-to-earnings ratio of 12: $45.6
  • Graham number: $14.5

The range of fair value is calculated as $32.2 to $40.9.

Qualitative Analysis
The strength of KMB is that it has a diversified product portfolio with each business segment contributing 10% to 20% of the revenue. The flat revenue, EPS, and cash flow trends are the reflection of the fact that demand for its products (personal care, household items, etc.) are stable, albeit not growing. Putting this in context of business environment, KMB’s growth and profitability is under pressure from locally branding products.

Conclusion
In near term, the flexibility in payout factor and stability (or slow growth) in revenue/EPS provides room for maintaining the consistency is dividend. However, assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividends will be under pressure. The dividend growth rate will slow down. The stocks risk-to-dividend number is 2.43, which is high risk to dividends. In addition, the current pricing for KMB is significantly above my fair value that I would be willing to pay to buy this stock. I will not be initiating any new position. I will continue to watch KBM for changes in its fundamentals.


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