Volatility has returned to the stock market in a big way over the course of 2018. The VIX, often called the "fear index," has more than doubled year to date. This indicates the level of investor fear is rising, and volatility is having an impact on market sentiment.
For investors looking to shield themselves from the turbulence, Kimberly-Clark (KMB) is a strong dividend stock for shaky markets. Kimberly-Clark is a very steady company, with a consistently profitable business model, even during recessions. Even better, KMB is a high-yield dividend growth stock. The shares currently yield 3.5%, and the company has increased its dividend for over 40 years in a row.
This streak of dividend increases makes Kimberly-Clark a high-quality Dividend Aristocrat. We believe the company will continue to generate reliable dividends for shareholders over the long term, no matter what the stock market does.
Strong Brands Built for All Economic Climates
The stocks that offer investors the most defense against falling markets, have a number of qualities in common. They have profitable business models that see consistent product demand, regardless of the economic climate. These are products that consumers use regularly as part of their daily lives, and cannot go without. In addition, defensive stocks have modest valuations, high dividend yields, and the ability to raise their dividends each year.
Kimberly-Clark possesses all these qualities. The company operates in the consumer staples sector. It sells products such as diapers, paper towels and tissues.
The company sells its products in over 175 countries around the world, and has a diverse product lineup. Its Personal Care segment includes many of its flagship brands, such as Huggies, Pull-Ups, Kotex, Depend, and Poise. The Consumer Tissue segment includes Kleenex, Scott, Cottonelle, Viva and more. Kimberly-Clark also services business customers through its K-C Professional operating segment.
It has a highly profitable business model, thanks to its strong brand portfolio. The company had over $18 billion in sales in 2017. Five of Kimberly-Clark's individual brands generate over $1 billion a year in sales.
According to the company, approximately 25% of the world's population uses a Kimberly- Clark product at least once per day. This results in a steady flow of sales and profits each year, and provides for modest growth.
In the most recent quarter, Kimberly-Clark delivered organic sales growth of 1%, along with 7% growth in adjusted earnings per share. Organic sales growth was driven by price increases and favorable product mix, partially offset by lower volumes.
Pricing power is another benefit of Kimberly-Clark's strong brands. The company has the ability to raise its prices to generate revenue growth, which lesser brands cannot do as effectively.
Shareholders Can Clean Up With This Dividend Stock
Kimberly-Clark currently pays a quarterly dividend of $1.00 per share, equaling an annual payout of $4.00 per share. The company has increased its dividend each year for the past 46 consecutive years.
No company can maintain such a long history of rising dividends without the ability to consistently grow earnings. It experienced only a minor 4.5% decline in EPS over the course of the 2007-2009 financial crisis and resumed healthy earnings growth in subsequent years. Investors should expect Kimberly-Clark's profits to hold up well if another recession occurs.
As a global manufacturer, Kimberly-Clark has multiple competitive advantages that fuel its consistent earnings growth over time. First, the company can generate operational efficiencies to grow profit margins. The company has employed a cost-reduction program which it calls "FORCE," which stands for Focus On Reducing Costs Everywhere. Thanks to this program, it has improved its operating margin from 12.2% in 2012 to 14.6% in the most recent quarter. It generated cost savings of $145 million just last quarter. Kimberly-Clark's management team has extended this initiative for another three years, aiming for another $1.5 billion of cumulative savings. In total, the company intends to cut over $2 billion of costs through 2021. This will be the main earnings growth driver moving forward.
The emerging markets are another driver of future growth. One of the most compelling growth catalysts for Kimberly-Clark is expansion in the emerging markets such as China, which have large populations and high economic growth rates. For example, there are recent news reports that China may end its two-child policy.
If China ends its nearly four-decade long family planning policies, this would be highly positive for Kimberly-Clark's diaper brands. Overall, the developing and emerging markets generated 5% organic growth in Kimberly-Clark's core Personal Care segment last quarter, compared with 2% growth in North America.
Kimberly-Clark expects 1% organic sales growth and 6% to 9% earnings growth in 2018. Steady growth allows Kimberly-Clark to return lots of cash to shareholders. Last quarter, the company returned $520 million to shareholders through dividend payments and shares repurchases. Company management is committed to paying rising dividends. There is plenty of room for the company's dividend growth to continue.
Excellent Risk-Adjusted Returns
Investors can expect annual returns in the high-single-digit range from Kimberly-Clark shares going forward, due to earnings growth and dividends. Reasonable expectations are for the company to grow earnings by at least 4% per year.
On top of this, the stock has a compelling dividend. The current yield of 3.5% is significantly higher than the S&P 500 average yield. Kimberly-Clark expects to generate earnings per share of $6.60 to $6.80 this year. With a $4.00 per share dividend, Kimberly-Clark has an expected dividend payout ratio of 58% to 60% for 2018. This is a manageable payout ratio which leaves sufficient coverage to provide for future dividend increases, at least in-line with the rate of earnings growth.
Kimberly-Clark is a low-volatility stock with a defensive business model that should perform relatively well during a recession. This means investors looking for a recession-resistant company should consider Kimberly-Clark. It offers strong risk- adjusted expected returns in the 7%-9% range on an annual basis, with a high dividend yield and reliable dividend growth.
(This article was originally sent Dec. 12 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Peter Tchir, Chris Versace and others.)
