Finding The Trend Wave With A Blue-Chip Stock

In 1972, a shareholder of Kimberly Clark collected $0.06 over the course of the year for 1 share of KMB stock. In 2015, such a shareholder would have collected $3.52 per share. Adjusted for inflation, Kimberly-Clark paid the equivalent of $0.27 per share in 1972 dividends. That means you are looking at an actual thirteen-fold increase in the real purchasing power of Kimberly-Clark dividends without taking into account the wealth created by capital gains and dividend reinvestment over the past 43 years.

It has compounded at 14.2% annually since 1972. It’s been of those stocks true to the Benjamin Franklin adage that compounding is the stone that turns all lead into gold. A $10,000 KMB investment in 1972 would be $4,500,000 today, giving you $13,000 per month in dividends. It redefines the holy grail of long-term dividend investment: instead of aiming to collect more in annual dividends than the initial investment amount, Kimberly-Clark would have managed to produce more monthly dividends than the amount invested.

What I find interesting is this: Despite the excellent record of compounding, it is still only a $40 billion company. That’s much smaller than a somewhat similar blue-chip Johnson & Johnson with a $277 billion market cap.

I am always interested in trying to find companies that have: (1) demonstrated records of excellence mixed with (2) the prospect that the future might even be better than current expectations. As much as I think we can learn from the past, you can never escape the fact that you have to make some kind of gauge about the future when you make an investment.

In the 1950s, White Castle was the pre-eminent fast food chain. It roared to 30% annual growth in the 1920s because of the quick five cent hamburger. The reason McDonald’s was able to dethrone it in the 1960s? It anticipated the shift to drive thrus and suburbanization. White Castle’s business model in the 1950s relied on being open all the time and being highly visible in urban areas so the high area foot traffic would convert to strong sales. It was an excellent formula–White Castle refused to franchise and just collected the high profit streams from its urban locations.

But McDonald’s was able to surpass it by pioneering the drive-thru and understanding the importance of quick access for drivers on their commute while White Castles became more difficult to access through traffic in city squares, and the cheap +open all night formula started to backfire when cities like Chicago deterred customers because White Castle became a gang hang out. White Castle has gone private, but McDonald’s has delivered 17.5% annual returns since the April 21, 1965 IPO. The knowledge of suburbanization plus drive thrus, plus McDonald’s ability to capitalize on the trend with attractive real estate, provided a wave for investors to ride towards superior returns.

Even though Kimberly-Clark has been an undercovered stock in my financial writings, I nevertheless see the company as having an unusually bright future. Projections in the adult diaper market call for 8.5% annual sales growth between 2015 and 2040, and I imagine that the sale of Depends will propel earnings growth forward in the years ahead. The international sales growth has been excellent, but Kimberly-Clark has happened to do business in countries with particularly weak currencies compared to the U.S. dollar. I found this line from the annual report particularly telling: “EPS growth in international markets totaled 11% in the 2014 calendar year…[but] FX effects led to a reported slip of 4% overall.”

Kimberly-Clark deserves a spot on the list of the four of five dozen multinational companies that is reporting earnings per share growth inconsistent with the underlying reality because of the translation back to the U.S. dollar.That is why Kimberly-Clark, which is making $5.20 per share in profits this year, has analysts calling for $8.20 per share in profits in 2021. Growth, plus some currency reversion, will likely boost Kimberly-Clark’s reported figures at some point in time. And I don’t think investment success necessarily depends on getting the “when” right, as you can just sit back and reinvest in the meantime (why would you want to sell a stock that gives you 8.2% raises every year for a half century?).

My only negative qualifier is that Kimberly-Clark is negatively affected in the short-term by negative currency effects because it boosted the dividend payout ratio in native U.S. dollars. A lot of Kimberly Clark’s cash is trapped overseas, and as a result, the U.S. cash position has dipped to $500 million (the lowest in the modern 1990+ era), the pension is now $1 billion underfunded, and there is now $7.7 billion in balance sheet (which I would classify as moderately high compared to the $1.8 billion in profits).

That qualifier aside, someone that owns Kimberly-Clark over the coming decades will likely do quite well, with my estimated compounding rate somewhere around 11% to 12% annually over the coming twenty years. The market for its core products is going to grow in the United States, and it is still relatively new to international expansion (compared to something like GE or Coca-Cola.) It doesn’t get a lot of attention because the business itself in unexciting and the stock always appears a little bit overvalued, but the current earnings are understated and the sales growth ought to be 6% or so across the portfolio of brands for the long haul. That usually translates into 8% to 9% earnings growth, plus you get a 3% dividend. I think even the scrupulous investor would be hard-pressed to come up with more than a few dozen better investment alternatives to Kimberly-Clark.