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Trouble Ahead For Kimberly-Clark Investors?


Kimberly-Clark is a Dividend Champion with a 44 year streak of rising dividends.

Shares are currently trading around $130 per share giving investors a current yield of 2.82%.

Balance sheet deterioration should be a major concern for equity holders.

Investors shouldn't expect a return to high single digit dividend growth anytime soon.

As a new dad going through plenty of diapers I couldn't help but look into the maker of Huggies diapers. We're going through an 88 pack box in about a week's time which means lots of cash leaving my pocket and going to the maker, Kimberly-Clark Corporation (NYSE:KMB).

I love consumer staples as part of the core of my portfolio and Kimberly-Clark is a company that I've always had my eye on, but have yet to add it to my portfolio. You can't get much more staple with your product lineup than diapers, Kleenex and paper towels.

Let's examine Kimberly-Clark a bit closer to see what makes them tick and how they've been able to amass a 44 year dividend growth streak. Of course a quality company doesn't mean it will make a good investment so we'll look at the valuation too.

How about that dividend?

First and foremost for dividend growth investors is the quality of the company. If a company consistently grows the dividend payment year after year there's a high likelihood that the company is high quality.

Kimberly-Clark is no exception with 44 consecutive years of increases. A streak that long is enviable and gives them the title of Dividend Champion.

The following chart shows the quarterly dividend payment from Kimberly-Clark since 1993.

Every year like clockwork the dividend raises have come. However, just because a dividend is increased doesn't necessarily mean the raise is adequate. That's why it's important to look at the percentage increase of the dividend. The following chart shows the 1-year, 3-year, 5-year and 10-year dividend growth rates from 2002 through 2016.

On a year to year basis dividend growth has significant variance with a low of 3.4% in 2009 and a high of 17.6% in 2004. Due to that variance I prefer to look at the dividend growth over longer time periods such as 3-year, 5-year and 10-year periods. That smoothes out the annual fluctuations in dividend growth.

The most striking piece of information from the above chart is the noticeable downward trend in the dividend growth rate for all periods. There's a definite trend evident in the dividend growth rates that Kimberly-Clark has rewarded shareholders with.

While Kimberly-Clark has managed to grow the dividend for 44 years, not all is well currently as the dividend payout ratio has climbed over 100% for both earnings and free cash flow for 2015.

Kimberly-Clark has clearly been a shareholder friendly company that consistently rewards owners with dividend increases. I don't doubt that managements' goal is to increase the dividend; however, the payout ratio levels will keep the dividend growth muted while the company works through its issues.

Historic Metrics

In isolation a growing dividend doesn't tell us much. We have to examine the growth of the underlying company to determine the future path of the company and in turn the dividend.

Revenue has barely inched forward over the last 10 years. From 2005 to 2015 revenues only grew by 1.6% per year. There is a bit of promise in that chart and that's that revenues grew 4.6% per year from 2005 to 2011.

Part of the revenue decline over the last few years is due to foreign exchange back to the U.S. dollar. In 2015 organic local currency sales improved by 5%; however, currency exchange was an 11% drag on reported revenues leading to a net 6% decline for the year.

I like to look at the rolling 3-year growth rates for revenue...