Monday, October 23, 2017

Kimberly Clark (KMB) Is Worth a Look at These Levels

            Dividends are central to my investment philosophy.  They not only lower portfolio volatility but also provide a continued source of funds for reinvestment.  In that vein, I continually monitor a small list of companies that have consistently raised dividends for at least 25 years.  When these companies are weak technically, it’s an appropriate time to examine them as a potential addition to a portfolio.  I detail this process in my book The Lifetime Income Security Solution.

            Kimberly Clark is currently looking attractive from a technical perspective:

The weekly chart (top chart) shows a double-top in the first half of this year followed by a consistent downtrend.  Weekly prices are currently approaching the 200-week EMA.  The daily chart (bottom chart) is very weak; it is below the 200-day EMA and recently gapped lower. 

            According to their latest 10-K, KMB has three lines of business:    
  •      Personal Care brands offer our consumers a trusted partner in caring for themselves and their families by delivering confidence, protection and discretion through a wide variety of innovative solutions and products such as disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products.  Products in this segment are sold under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Kotex, U by Kotex, Intimus, Depend, Plenitud, Poise and other brand names.
  •        Consumer Tissue offers a wide variety of innovative solutions and trusted brands that touch and improve people's lives every day.  Products in this segment include facial and bathroom tissue, paper towels, napkins and related products, and are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Neve and other brand names.
  •       K-C Professional ("KCP") partners with businesses to create Exceptional Workplaces, helping to make them healthier, safer and more productive through a range of solutions and supporting products such as wipers, tissue, towels, apparel, soaps and sanitizers. Our brands, including Kleenex, Scott, WypAll, Kimtech and Jackson Safety, are well-known for quality and trusted to help people around the world work better.

The company faces intense competition.  This means KMB must very efficient.

            Their balance sheet (as researched on isn’t as clean as I would like.  But a high asset/liability ratio is less important for a multi-billion dollar company.  Over the last 5 years, total assets have decreased about $5 billion, thanks to a modest decline in receivables along with a larger decline in property, plant, and equipment (about $800 billion) and inventories (about $900 billion).  Turning to liabilities, the company has increased its debt levels by about $1.4 billion, which is to be expected during a period of record-low interest rates.  According to their revenue statement, their interest expense is 1.75% of gross income – a manageable level.

            Expenses demonstrate that management is top-notch.  Over the last 5 years, their gross margin has improved by 450 basis points, their operating income has risen nearly 550 basis points and their net margin has increased almost 390 basis points.  And then there is EBITDA, which is up 525 BPs.  Considering the intense competition in their market, these are very important and impressive numbers.

            The company is large enough to fund current expansion out of net income.  This means the primary play on their cash flow statement is in their financing structure.  Over the last 5 years, they’ve done a large amount of debt-refunding, which is prudent in a low rate environment.  They have also been buying back stock at a solid pace – another great way to reward shareholders.

            According to FINVIZ, their current yield is 3.42% -- which is about 60 basis points higher than the AAA effective yield and on par with a BBB effective yield (according to FRED) data.  Their dividend coverage ratio is just south of 62%, which means they have room to raise it further.          

              Technically, the company is weak, which means it’s time to look at this company.  While the balance sheet isn’t that impressive, the rising margins show management is very good at its job.  The company has taken advantage of low interest rates to refund its debt; interest rate expenses are under control.

            Overall, this KMB is currently worth a look

     This post is not an offer to buy or sell this security.  It is also not specific investment advice for a recommendation for any specific person.  Please see our disclaimer for additional details.