Why This Household Product Maker Can Make Your Portfolio Sparkle
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In continuing a theme, I want to write about another company that a lot of folks in my generation seem to think of as a “boring” and “dull” investment, when in fact it’s anything but. I have recently written about ExxonMobil and Johnson & Johnson as excellent long-term holdings, and today I want to focus on my favorite household product maker, Kimberly-Clark (NYSE: KMB). I tell my friends that these “boring” stocks should make up the majority of any portfolio, while also stressing the importance of diversification, and this is a great addition to a diverse portfolio of long-term winners.
Who is Kimberly-Clark?
Kimberly-Clark produces a variety of consumer and household products, but is best known for the brands of Kleenex, Scott, Huggies, and Kotex. The company has grown and diversified itself (and especially its healthcare business) over the past few decades through a series of acquisitions.
The company divides its business into four segments. The personal care segment is the largest at 46% of the company’s sales, followed by the consumer tissue segment (31%), professional products (16%) and health care (8%) segments. Despite its size and success, the company still has room to grow internationally, as half of the company’s sales come from North America.
Performance and valuation
Over the years, Kimberly-Clark has done an excellent job of growing its product offerings, global reach, and as a result, revenues. In fact, over the past decade, Kimberly-Clark has grown its revenue in every year except one, and has managed to increase its dividend every single year as it has done since it began paying dividends in 1935.
Shares trade for 17.4 times this year’s expected earnings of $5.72 per share, which admittedly sounds a bit high. While earnings are projected to grow at around 8% annually over the next few years, I believe there is a premium on Kimberly-Clark because of its incredible record of growth and performance, as well there should be. The company also does an excellent job of delivering value in the form of share buybacks, and in fact has reduced the total amount of shares by over 7% in the past three years alone. Before we go diving in, since it does seem like it might be a bit pricey, let’s see what else our investment dollars could buy.
Others to consider…
There are several other household products giants to consider. The largest on my list, Procter & Gamble (NYSE: PG) is about six times the size of Kimberly-Clark and produces an enormous variety of consumer products. Just to name a few, Procter & Gamble’s brands include Olay, Pantene, Gillette, Crest, Downy, Duracell, Tide, and Pampers. Procter & Gamble trades for 19.8 times 2013’s expected $4.04 per share earnings, and is projected to grow at about the same rate as Kimberly-Clark. They also pay a slightly lower yield of 3%, as opposed to 3.25% for Kimberly-Clark. This may not sound like much of a difference, but it can compound tremendously over the years.
Another option is Colgate-Palmolive (NYSE: CL), which is in the middle of the other two in terms of size. This company produces such household brands as Colgate and Palmolive (obviously), as well as Ajax, Irish Spring, Softsoap, and Speed Stick. Shares are the priciest of the three at 20.6 times this year’s earnings, but the company is expected to grow its earnings by a slightly higher rate of about 10% annually for the next few years, so the valuation is justified. Just like Kimberly-Clark, Colgate-Palmolive has an excellent share buyback program and has reduced the total number of shares by 8.7% over the last three years.
All of these are great long-term prospects, but I think that Kimberly-Clark is the best value right now. Having said that, what makes earnings season so exciting is that this can all change instantly. Kimberly-Clark reported better than expected earnings but lower revenue this morning, so pay particular attention not only to the numbers themselves, but also to any updates the company gives on its outlook for the next few years (particularly in emerging markets).
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!