Prospects Look Bright for Kimberly Clark

siraj is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Historically, companies operating in the household and personal product industry have consistently generated double digit returns. This industry has been one of the best choices for conservative investors. Price stability, financial strength ratings, and earnings predictability are naturally very favorable. On top, most of these equities are offering appealing dividends with steady price appreciation.

The household and personal product industry is sought as defensive investments because this industry provides solid downside protection in challenging periods. This industry is relatively established; thus, sales and earnings flows are comparatively stable and predictable right through the business cycle.

For consistently increasing profitability, their business strategy always involves mergers and acquisitions. Overseas expansion and innovation are another means to capture mass or niche market share. Kimberly Clark (NYSE: KMB) is one of the best large caps operating in the household & personal products industry. In this piece of writing, I look at Kimberly Clark’s financial situation for sustainable returns.

Kimberly-Clark dividend profile

KMB Dividend data by YCharts

It is seen as one of the best and safest companies for income oriented investors. At the moment, it offers a quarterly dividend of $0.81 per share, yielding 3.32%. In the past five years, it has been able to enlarge its annual dividends from $2.12 per share in 2008 to $3.24 per share in this current year. It has been also managed to increase its payout ratio over the past several years. At present, its payout ratio based on dividends stands at 65.9%.

Kimberly’s share price has also gone up over the past years with a solid dividend and strong financial position. In the past five years, its price went up by nearly 57%. At the time of writing, its stock is trading at $97.68 which is off from its 52 week high of $106. At the current price, its stock is trading at 21.6 times earning, which looks a bit pricey to me.

Financial analysis

Kimberly-Clark and its well-known global brands are an essential part of life for people in more than 175 countries. Each day, about a quarter of the globe's population trusts its K-C brands. With solid brands like Scott, Kleenex, Huggies, Kotex, Pull-Ups and Depend, Kimberly-Clark holds the No. 1 or No. 2 share position in over 80 countries.

With these solid brands, it is generating increasing profits year over year. Kimberly is operating under four business segments named Personal Care Segment, Consumer Tissue Segment, K-C Professional (KCP) Segment and Health Care Segment. All business segments are generating solid result for the company.

Recently, Kimberly announced second quarter results with consolidated sales of $5.3 billion. In the second quarter, it was able to grow organic sales by 3%; however, it lost 2% of sales in conjunction with pulp and tissue restructuring and European strategic changes. Still with the slow growth in the top line, it has been able to achieve 6% growth in operating profits.

The company is strongly working on cost saving measures which led it to increase operating profit by $80 million. As a result of cost saving measures, it has improved adjusted operating profit margin by 80 basis points and reported an 8% increase in adjusted earnings per share in the latest quarter. For the full year, it is anticipating saving $300-$350 million through the cost saving program and organic sales growth of 3% to 5%, led by K-C International.

In million

2011

2012

Trailing twelve months

Operating cash flow

$2,288

$3,288

$3,310

Capital expenditure

($968)

($1,093)

($1,108)

Free cash flow

$1,320

$2,195

$2,202

Source: Morningstar.com

Kimberly has been showing a strong cash position to sustain its dividend. Its operating and free cash flows are growing year over year. In the trailing twelve months, its free cash flow stands at $2.2 billion when dividend payments accounted for only $1.1 billion. I believe its dividend is sustainable as long as its free cash flows provide full coverage to its dividend payments.

Competition

Kimberly's main industry peers are Procter& Gamble (NYSE: PG) and Clorox (NYSE: CLX). Procter & Gamble provides branded consumer packaged goods. Procter & Gamble is seen as one of the safest companies for dividend investors. Recently, this company increased its quarterly dividend to $0.6015. P&G has a long history of dividend increases. In the past year, its payout ratio stands at 56%, which offers more room for dividend increases.

P&G has a strong financial situation to back its dividend payments. Both its top and bottom line performances are strong. Its profitability is improving as global market share trends improved. P&G is seeking to enhance profits with organic growth and cost cuttings. For this full year, P&G is expecting to generate organic growth of 4%. It is expecting to generate earning per share growth of more than 10%.

Clorox is a manufacturer and marketer of consumer products. Clorox is also considered as a safe bet for income seekers. Recently, Clorox increased its quarterly dividend by 11% to $0.71 per share. This company is planning to sustain returns by improving productivity across its operations, increasing investments in demand-building programs and delivering meaningful product innovation.

Clorox is seeking to achieve 4% growth in its top line by the end of this year. Additionally, this company is also working on cost saving plans to enhance operational income. It continues to expect earnings before interest and taxes margin to enlarge 25-50 basis points for the full year.

In conclusion

This industry is coming out of recession. Companies in this industry are working on cost cutting measures, innovations and emerging markets. With these plans, these companies are generating both top and bottom line performance. Kimberly Clark is generating high bottom line performance when the top line is bit low. It has the ability to generate hefty cash flows, which is a positive sign for its dividend sustainability. 

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siraj sarwar 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!

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