Kimberly-Clark's Healthcare Spin-off Will Enhance Shareholder Value

Conglomerates often unlock shareholder value by either divesting a slow-moving segment or spinning off an unrelated segment to concentrate their efforts on their core businesses. Recently, Kimberly-Clark (NYSE: KMB  ) revealed its intent to spin-off its health care business to focus on its larger personal care, consumer tissue, and K-C professional segments. The company will make a tax-free distribution of 100% of the new health care company's stock to existing Kimberly-Clark shareholders. Is this the right decision for Kimberly-Clark? Let's take a closer look and find out.

The lowest return among the company's businesses
In 2012, the health care business generated $1.62 billion in sales, or 7.7% of total sales, and $229 million in operating profit, which accounted for 8.5% of total profit. Compared to other business segments, the health care business had the lowest return on assets.

2012 figures (USD millions)

Net sales

Operating profit

Assets

Operating margin (%)

Return on Assets (%)

Personal Care

9,576

1,660

7,014

17.3%

23.7%

Consumer Tissue

6,527

887

5,531

13.6%

16%

K-C Professional

3,283

545

2,739

16.6%

19.9%

Health Care

1,622

229

2,531

14.1%

9%

Source: Kimberly-Clark's 10K filing

Although the consumer tissue segment delivered the lowest operating margin at 13.6%, it had a decent return on assets at 16%. With the same level of assets, the health care business was the least profitable. 

In the third quarter, the health care business experienced 4% organic sales growth, driven by an 8% increase in volumes in the medical device business. Healthcare operating margin increased to 17.4% due to organic sales growth, cost reduction, and below average spending. 

The health care business improved nicely in the third quarter. However, on a nine-month basis, health care net sales dropped by 1% to $1.2 billion. The operating profit of the health care segment remained flat while other divisions experienced at least 5% operating profit growth. The consumer tissue and K-C professional segments enjoyed higher growth of 9.4% and 12.8%, respectively, on a nine-month basis. 

Unilever and Procter & Gamble deliver value via business restructuring
After spinning off the health care business, Kimberly-Clark can focus on its more profitable segments: personal care, K-C professional, and consumer tissue. Unilever (NYSE: UL  ) also restructured its business to drive future operating performance. Unilever has sold several slower-growth, non-core food businesses such as North American frozen meals and Skippy peanut butter. It also divested two of its main European frozen food brands, Bird's Eye and Igloo, and sold the Wish-Bone and Western Dressings brands to Pinnacle Foods. Moreover, Unilever also cut unprofitable businesses which only added to its volumes. Unilever expects to reduce its brand portfolio from 1,600 to 400 by 2015 so it can focus its resources and efforts on growing its personal and home care businesses. 

Another big global consumer player, Procter & Gamble (NYSE: PG  ) is also pursuing corporate restructuring. It announced that it will restructure its brand portfolio by increasing its business divisions from two to four segments which will include baby, feminine, and family care, home care, beauty and health, and grooming. The division redesign could accelerate the company's global expansion and innovation, improving the company's financial performance.

CEO A.G. Lafley said

This sector organization and leadership team will help us operate more effectively and efficiently to continue momentum behind P&G's growth strategies. These changes build on the productivity and organization design work led by Bob McDonald, and will help us get closer to consumers and become more agile with customers

My Foolish take
The health care spin-off could drive Kimberly-Clark's long-term shareholder value as the company can focus its efforts on growing other consumer businesses. Kimberly-Clark could fit into the long-term portfolio of an income investor with its juicy 3% dividend yield. The same logic applies to Unilever and Procter & Gamble with their global leading positions and their nice dividend yields of 3.70% and 2.80%, respectively. 

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