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Kimberly-Clark: Short-Term Tailwinds Dissipate

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In caller years, it has been adjacent to intolerable to conceive a agelong finance thesis for Kimberly-Clark (NYSE:KMB). Even aft each nan pandemic related tailwinds and monolithic summation of some nan S&P 500 and the user staples sector, nan company's stock value mislaid much than 10% since June of 2020 erstwhile I first warned of each nan risks associated pinch investing successful KMB.

ChartData by YCharts

Nevertheless, that does not mean that location aren't short periods of clip erstwhile swings successful investor sentiment could consequence successful Kimberly-Clark's stock value becoming excessively depressed. This was nan lawsuit successful October of past twelvemonth aft KMB fell astir 20% successful a matter of weeks. Although I reinstated my bearish thesis backmost then, I intelligibly illustrated why sentiment was connected nan incorrect broadside again (at slightest successful nan short run).

 Sentiment Is On The Wrong Side Again

Seeking Alpha

Since then, KMB has delivered astir double-digit returns and astatine 1 constituent was trading pinch a very wide spread to nan broader equity market.

ChartData by YCharts

Unfortunately, however, nan stock value is now quickly catching-up pinch reality and KMB is connected way to erstwhile again present very disappointing capacity successful 2023.

On 1 hand, we had nan anticipation that nan worst successful position of costs ostentation is already down america which spurred a activity of optimism crossed nan sector.

Overall, nan fibre marketplace prices person plateaued successful Q3, and they really began to move somewhat successful Q4.

Source: Kimberly-Clark Q4 2022 Earnings Transcript

On nan different hand, KMB besides capitalized connected important value increases, which were implemented crossed nan sector.

Kimberly-Clark 2022 Overview

Kimberly-Clark Earnings Release

One of its awesome peers - Procter & Gamble (PG), for example, has precocious announced that pricing contributed astir 8% wrong its Baby, Feminine and Family Care conception during its latest quarter, while volumes declined by 6%.

Procter & Gamble Pricing and Volume

Procter & Gamble Investor Presentation

This highlights nan comparatively debased pricing powerfulness wrong this merchandise conception and shows nan unattractive positioning of Kimberly-Clark arsenic a axenic subordinate successful user insubstantial products.

That is why, KMB now expects a specified 2% to 4% integrated gross maturation for 2023 and a akin summation successful net per share.

Kimberly-Clark Low Organic Growth

Kimberly-Clark Earnings Release

The Problem For Long-Term Shareholders

As nan institution continues to muddle done pinch debased integrated gross maturation and unchangeable to declining margins, its full free rate travel has not shown a worldly summation for nan past 20 years aliases so.

Kimberly-Clark Free Cash Flow

prepared by nan author, utilizing information from SEC Filings

The management, however, is bragging astir a 5% yearly summation successful nan company's dividend per stock since 2012 which is expected to make KMB charismatic for dividend investors.

Kimberly-Clark Dividend Growth

Kimberly-Clark Earnings Release

Usually, this mightiness beryllium capable of a logic to ain a slow-growth ample user staple business arsenic specified stocks connection debased consequence and predictability. The awesome problem successful this case, however, is that nan consistently increasing dividend costs is now squeezing nan company's level free rate flow, frankincense leaving small to nary room for much dividend hikes successful nan future.

Kimberly-Clark Free Cash Flow

prepared by nan author, utilizing information from SEC Filings

Kimberly-Clark's dividend per stock besides benefited from nan decreasing full number of shares outstanding.

Kimberly-Clark Shareholder Dilution

prepared by nan author, utilizing information from SEC Filings

The complaint of decline, however, has slowed down successful caller years arsenic KMB's debased free rate travel has made it harder and harder for nan institution to proceed to repurchase shares astatine specified precocious rates.

Kimberly-Clark Share Buybacks

prepared by nan author, utilizing information from SEC Filings

The business is moreover worse erstwhile we see nan magnitude of superior expenditure wrong nan free rate travel estimate. Total magnitude of Capex has now declined adjacent nan 2016-17 lows and is hardly capable to screen nan yearly depreciation and amortization disbursal of astir $750m.

Kimberly-Clark Capex

prepared by nan author, utilizing information from SEC Filings

As a percent of sales, yearly superior expenditure is now astatine 1 of its lowest levels ever astatine hardly supra 4%.

Kimberly-Clark Capex

prepared by nan author, utilizing information from SEC Filings

All that creates important difficulties for a institution that is expected to proceed to present accordant dividend increases and stock repurchases successful bid to compensate for debased topline growth. It besides creates a important civilized hazard problem for management, which is apt to see riskier movements successful its efforts to reinvigorate growth. In this case, an fierce M&A strategy aliases a ample acquisition successful a caller merchandise area is simply a highly apt script and 1 that seldom delivers shareholder value.

That is why, moreover erstwhile investing successful low-growth user staple businesses, investors should see nan semipermanent strategy of a business and really it positions it to beryllium competitive. This process often requires unpopular decisions to beryllium made successful nan short run, successful bid to unafraid competitory advantages successful nan future. It is what I telephone 'the roundabout route' and is an area of attraction crossed each of my precocious condemnation ideas posted successful The Roundabout Investor.

Conclusion

After a fewer months of respite for Kimberly-Clark shareholders, nan stock value is erstwhile again turning south. Although bully news could beryllium expected successful nan adjacent term, these would apt beryllium constricted to a broader diminution successful earthy worldly prices aliases somewhat amended than expected measurement declines. In nan meantime, mean to semipermanent shareholders are still faced pinch each nan risks associated pinch level free rate travel and nan request for higher shareholder distributions.


Looking for amended positioned precocious value user staple businesses? 

You tin summation entree to my highest condemnation ideas successful nan assemblage by subscribing to The Roundabout Investor, wherever I uncover conservatively priced businesses pinch superior competitory positioning. The opportunities laid retired successful nan work also capitalize connected inefficiencies successful nan marketplace associated pinch short-termism, momentum chasing and communicative driven expectations. For much accusation travel nan link provided.

Editor: Naga



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