Kimberly Clark Dividend – Slowing Or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Let's get this out of the way first, Kimberly Clark (NYSE: KMB) shareholders, I'm not sure that your dividend is safe. I haven't heard anyone else suggest this, but there are some very troubling numbers tied to this company. You would think with brands like, Huggies, Kotex, Kleenex, Scott, and Cottonelle, that the company would be fine. I'm not suggesting that the company is in trouble, but I am suggesting that the dividend might not be raised in the near future. Let me show you what I've found.
First, let's look at some trends of the last few years. As the economy fell into shambles, customers were forced to make hard choices. One of the choices was to try out store brands, instead of buying the name brands to save money. This change was based really on simple economics. This is the same thing that has caused Procter & Gamble (NYSE: PG) such a headache. A few years ago, if you looked at analyst expectations for growth for both Kimberly Clark and Procter & Gamble you would have found EPS estimates for over 10% growth. Today, Kimberly Clark is expected to grow by about 8%, while P&G is only expected to grow by 7.38%. The reason for this decline goes beyond that the companies are big and facing economic headwinds around the world. The issue is some consumers have switched to certain store brands for good.
In my own household I can give one example. A box of 156 Up & Up diapers (a Target brand) costs $25.99 or about $0.17 per diaper. A box of Huggies (Kimberly Clark brand) with 186 diapers costs $44.99 or about $0.24 per diaper. A box of Pampers (P&G brand) with 160 diapers costs $44.97 or about $0.28 per diaper. This leaves both Kimberly Clark and P&G as losers to the Up & Up brand. The fact that from our family's personal experience, the Up & Up brand is just as good as the name brands, means our household might not buy name brand diapers again. I know that some people read this and think well you're just one family, this isn't happening all over the place. I beg to differ, and Kimberly Clark's numbers back me up.
In the last three years, Kimberly-Clark's free cash flow has fallen from over $2.63 billion in 2009 to $1.32 billion in 2011. This caused the free cash flow payout ratio to jump from 37.45% in 2009 to 83.26% in 2011. In the first quarter of 2012, the free cash flow payout ratio rose again to 84.97%. Clearly this is an ongoing challenge for the company.
Another issue is the company's spending and its effect on the balance sheet. In the last two years, the company spent more than their free cash flow on dividends and share repurchases. In 2010 this wasn't a huge deal because the company overspent by just $1.2 million. However, in 2011 the company spent $1.147 billion above their free cash flow. In the first quarter of 2012 the pattern persisted, with the company spending $389 million more than free cash flow on dividends and buybacks. This puts Kimberly-Clark on pace to overspend by $1.56 billion this year. The reason this is a problem is the company is hurting its balance sheet. In the last three years, cash and investments dropped by $264 million, while long-term debt increased by $634 million. Like the rest of the issues, this problem persisted with long-term debt increasing again by $300 million in just the first quarter alone.
When it comes to dividend growth, you can see how the company has performed in the last 10 years:
From 2004 to 2009 the rate of dividend increase slowed nearly sequentially. In 2010 the company raised the dividend by 10%, but in 2011 and 2012 the rate has slowed again. Given the above issues, the slowdown in dividend increase shouldn't be a surprise.
What should investors expect from here? Analysts expect Kimberly-Clark to grow earnings by 8.1%. This would seem reassuring, except that in the last 5 years the company grew EPS by about 4% while free cash flow shrunk significantly. If free cash flow growth trails earnings as it has been, I would be shocked to see dividend increases of more than 3-5%. In fact, I would absolutely expect share repurchases to be curtailed to avoid further harm to the balance sheet. With the stock selling at about 15 times forward earnings and yielding about 3.75% I know the numbers look okay on the surface. The problem is below the surface the free cash flow payout ratio has jumped significantly and the balance sheet is getting much worse. I would avoid Kimberly-Clark shares until the company adjusts its spending to account for lower cash flow.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark and The Procter & Gamble Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.