Kleenex, Huggies, Depend and Kotex. Kimberly-Clark (NYSE:KMB) has some of the world’s most familiar brands. Its stock is trading at or near a 52-week high and within 6% of an all-time high. It’s really cooking, which leads me to believe its time to take some money off the table. Here are three reasons why.
Trading Pattern
This year through Aug. 26, Kimberly-Clark’s stock has traded between $61 and $68, a scant $7 range. I decided to go back over the past five years, and what I found was that the average yearly gap between its high and low is $11.14. However, if I take out the $24 gap from 2009 and the low of $5.90 gap from 2008, the average is more like $9.25. Already stretched to $7 with four months left in the year, is it really worth holding when it appears, at least based on the averages, that it has just $2.25 in potential appreciation left in the tank for a 3.3% return?
Furthermore, its stock has traded above $70 just once in the past decade, and even then, it was for two months only. Even if it does poke through $70 in the coming days, it likely doesn’t have the staying power.
Dividend
Kimberly-Clark is the ultimate dividend play. It has raised its dividend every year for 25 consecutive years. By doing so, it is a proud member of the Dividend Aristocrats, a select group of 41 stocks to achieve this accomplishment. Its biggest competitor, Procter & Gamble (NYSE:PG), also is on the list.
If you’re an income investor, I can understand your interest in its stock. The 4% yield is very attractive these days. However, at what cost does the dividend increase come? In 2000, Kimberly-Clark paid out $1.07 per share. Ten years later, in 2010, it was $2.64, a compound annual growth rate of 9.5%. That’s impressive — until you consider how it was achieved.
KMB reduced its share count by 22% from 533 million to 414 million through share repurchases. In 2010, it paid out $1.1 billion in dividends and $580.1 million in 2000. The compound annual growth rate based on total dollars and not per share are 290 basis points less at 6.6%. That’s decent, but not nearly as good as advertised. If you weren’t an income investor, why would you want to own it?
Free Cash Flow
Perhaps it’s because you like the free cash Kimberly-Clark throws off every quarter. In Q2 2011, it was $586 million. Twice in the past decade, it’s been over $2 billion annually. It’s a machine. However, that doesn’t necessarily make it worth keeping. What I see is a business that’s slowly piling on debt and using its cash flow generation as an escape route.
Its margins aren’t as good as they were a decade ago, yet its revenue keeps rising. They have to in order to generate the free cash necessary to buyback its shares so earnings appear to be growing. In the past five years, its cumulative free cash flow was $9.1 billion. From this, it used $5.4 billion to repurchase its shares and $4.8 billion to pay dividends. At the end of the day, it borrowed $1.1 billion to make this happen.
It might be a trend in recent years, but from a business perspective, you have to wonder about KMB’s future prospects if it’s borrowing to buy back shares. It seems far more sensible to pay dividends as you normally would, then use the remaining $5.4 billion to acquire other businesses. If there weren’t any worth acquiring, I definitely wouldn’t want to own its stock.
Bottom Line
If you need income, it’s stable. However, if you are looking for capital appreciation, this is not the place, despite being at an all-time high.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
