There are about a dozen large-cap publicly traded businesses that I have wanted to cover in depth, but have perpetually declined to do so because I wanted to wait for an opportunity for the stock price to be fair (or better). Kimberly-Clark has now reached such a price point at $104 per share.
On the consumer side, Kimberly-Clark is most famous for being the diaper maker that is responsible for Huggies, Pull-Ups, GoodNites, Kotex, Lightdays, Depend, Poise, and Little Swimmers as well as tissue brands such as Kleenex and Viva (Kleenex is one of those brands that has proven so successful that people don’t customarily ask for a tissue but rather say ‘Gimme a Kleenex.’”
These brands, as you might expect, are stodgy and recession-resistant. It doesn’t matter what the economy throws at you; you’re going to pay an extra $0.40 for Kleenex rather than the generic tissue.
My problem is that, as amazing as it is that Kimberly-Clark actually grew its profits during the last recession from $1.6 billion in 2008 to $1.8 billion in 2009 to $1.9 billion in 2010, Kimberly-Clark has long shared the characteristics that I associate with the food stocks.
Its portfolio largely consists of mature brands in established markets, and that means you have to get the price right. After all, revenues of $19.4 billion in 2008 are actually lower compared to $18.6 billion today. When there is no top-line growth, a lowered lid exists on your investment returns. You are not going to compound at 15% per year for fifteen years.
But, if you get the price right, you can own a market-dominant collection of assets that stands a fair chance of delivering 9-10% annual returns.
For most of the past five years, the Kimberly-Clark P/E ratio has been too high. I couldn’t believe that the stock price hit $138 per share in 2016 even though earnings were only at $6 per share. It is hard to build wealth paying 23x earnings for a business with no-top line growth. Over the past five years, Kimberly Clark has an average P/E ratio of 20.4.
Quietly, Kimberly-Clark has seen its stock price fall from the $130s in May 2017 to the low $100s today. At a current price of $104 per share, Kimberly-Clark offers a far better trade-off than at any point in its recent history. With Kimberly-Clark slated to earn $7 per share in profits this year, the valuation is 14.8x earnings. Investors haven’t seen that level since 2010.
I am intrigued. Even during the period of no revenue growth, Kimberly-Clark still grew core earnings at 3.5%. The dividend yield is 3.8%. And Kimberly-Clark repurchases 1% of its stock each. Even if the sluggish status quo persists, you can get your hands on an all-weather stock that can generate 8.3% total returns. My own expectation is that Kimberly-Clark will modestly grow revenues which will also modestly raise the P/E ratio and give investors that purchase Kimberly-Clark stock in 2018 a reasonable chance of earning 10% annual returns through 2028. Given how reliably stable the earnings stream is, that upside is worthy of consideration.
This seems like the investment season for giving the Kraft-Heinzes, General Millses, and Kimberley-Clarks of the world a fair look. These portfolio staples were just too highly priced in recent years to support any kind of meaningful investment. And during recessions, it is the high-quality companies that have fallen on short-term crisis that tend to deserve the most attention. If your portfolio has acquired too much tech, cyclical, and financial industry exposure in recent years, now is a great time to direct future cash flows towards those ‘ole reliable steady businesses that have transitioned from overvaluation to fair pricing.
This is a publicly available version of an article shared with The Conservative Income Investor’s Patreon followers on May 24, 2018.