Bless You! Kimberly-Clark (KMB) and the Safe Dividend

Kimberly-Clark (KMB) is not only the producer of well-known paper products such as Kleenex, Kotex and Huggies, but is also sitting on a 4.28% dividend yield.

The company is based in Irving, Texas, and has approximately 55,000 employees. Kimberly-Clark (KMB) is a global health and hygiene company focused on product innovation and building its personal care, consumer tissue, K-C Professional and Other and health care brands. The Company is principally engaged in the manufacturing and marketing of a range of health and hygiene products worldwide, including disposable diapers, training and youth pants, baby wipes, feminine and incontinence care products, facial and bathroom tissue and paper towels, napkins, wipers and a range of safety products.

With a market capitalization of $25 billion, Kimberly-Clark (KMB) is one of the largest companies in the world. In 2009, the company earned $1.8 billion, which was 11% higher than 2008. The dividend last year came in at $2.40 (paid quarterly at $0.60 per share), which was 3.4% above that of 2008. Since 2005 the dividend has grown 7.45% every year. For the first quarter of 2010 the dividend was raised 10% to $0.66 per share. The yield of 4.28% is above both the Paper & Paper Products industry average of 3.55% and the average stock in the S&P 500 Index at 2.49%. This is even more impressive since most companies in the Paper & Paper Products industry do not pay a dividend.

On a price to earnings basis the company is on a 13.83 times, with a price to sales of 1.31 times. The price to book is 4.74 times and the price to cash flow is 9.82. All these ratios except for the price to book are well below rivals, which is good. In addition the company has an operating margin and net margin above that of competitors. This means that on a similar increase in sales, Kimberly-Clark (KMB) will earn more profits relative to the competition.

Even more impressive is the effectiveness of Kimberly-Clark (KMB), as the company has a return on equity of 41% and a return on investment of 13%. Despite average performance at generating revenues from employees, the company is among the best at managing their owner's equity and at managing their resources compared rivals. The interest cover is 11.8 times which indicates the firm will unlikely have any problem repaying debt, which sits at 48% of total capital.

Going forward the chief risk to the dividend is higher input costs, which the company is experiencing so far in 2010. According to the company’s latest quarterly results, management expects the company to earn between $4.80 and $5.00 for fiscal 2010, which indicates a 7.8% increase on 2009. Given that the quarterly dividend has already been raised 10%, then it’s likely the 2010 total payout will come in at $2.64, representing a 10% increase. The company believes inflation in key cost inputs of $600 to $700 million compared to the previous assumption of $300 to $400 million will be felt. This reflects estimated average market pricing for benchmark northern softwood pulp of approximately $920 to $940 per metric ton, which is an 85% increase.

On the latest quarterlies Chief Executive Officer Thomas Falk said, “Despite the near-term input cost headwinds we are facing, we will continue to strengthen our brands, pursue our targeted growth initiatives and reinvest in our business for future growth. We have launched a number of innovations this year and will bring more to market as the year progresses. We will support our brands with strong marketing programs and continue to expect that strategic marketing spending will rise at a faster pace than sales in 2010. Given recent input cost changes and expectations for additional near-term increases, particularly with pulp, we are now experiencing significantly higher cost inflation in 2010 than previously estimated. So, we are aggressively looking for ways to increase revenue realization and focusing on generating incremental cost savings and controlling discretionary spending.”

Over the last 30 years Kimberly-Clark has grown its annual dividend at 8.9% per year, and the dividend has increased every year since 1980.

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