Why It Might Be Time To Sell Kimberly-Clark

As the market seems to be inching ever higher, some may be tempted to take some profits or do a little "pruning." Despite the fact that the S&P 500 index is trading at more than 20 times trailing earnings, a premium to its historical average of 15.5 times, many of the biggest blue chip, dividend-paying stocks are still at or around their average price-to-earnings ratios for the last couple of decades. In short, many dividend payers are not yet too expensive and are at least still worth holding.

But one possible candidate for pruning might be Kimberly-Clark (NYSE: KMB  ) . The paper-products giant has been on a roll. Kimberly-Clark has been boosting its earnings per share in three different ways: margin increases largely from productivity gains, a reduced share count resulting from stock buybacks, and finally organic growth. This article will look at Kimberly-Clark's operational results as well as its valuation. It will also compare the company to its largest competitor, Procter & Gamble (NYSE: PG  ) . 

Steady growth from a steady business
This year Kimberly-Clark is on track to grow organic sales by an impressive 4%. This growth, which is noteworthy for such a large consumer-products company, is boosted by the increasing adoption of diapers for children in countries such as Brazil, China, and Russia. Huggies sales in all three of these countries have grown by 25%, 45%, and 35% respectively. P&G, for its part, has thus far also grown organic sales by 4% this year.

Both companies' greater exposure to emerging markets has a lot to do with this positive organic trend. Combining this organic growth with steady margin improvements and a significant buyback, Kimberly-Clark expects that its earnings per share will increase by between 8% and 10% this year. This is a healthy growth rate, which many blue chip US companies would envy. P&G is close by. It expects EPS to increase between 7% and 9% this year.

But Kimberly-Clark is expensive
So operationally, Kimberly-Clark and P&G are more or less comparable. But valuation is where the two companies diverge. Let's look at the two charts below. 

Source: FAST Graphs 

This first chart from FAST Graphs shows the fundamental valuation of Procter & Gamble over the last 15 years. Notice that the stock price (in bold black) now trades very close to its average price-to-earnings ratio displayed as the solid blue line. 

Source: Fast Graphs 

Kimberly-Clark is a different story. Its price-to-earnings ratio sits at 18.5 times trailing earnings, which is indeed a bit lower than P&G's. However, Kimberly-Clark's average price-to-earnings ratio is only 16.4 times. That is an 11.4% premium to its average. Therefore, the stock is moderately overvalued. P&G, on the other hand, is trading right at its P/E average. Those whom have been long Kimberly-Clark since the beginning of this year are up by more than 20%.

Bottom line
While the average P/E is a good place to start, it is not a "be all, end all" indicator. Operationally speaking, Kimberly-Clark has been performing very well as of late. With impressive emerging markets growth, steady 8% to 10% earnings-per-share growth, and finally improving margins, Kimberly-Clark may indeed deserve to trade at a ratio similar to P&G. Perhaps its P/E ratio should be higher going forward as the company takes advantage of a strong emerging market trend and also continues to improve its profitability.

But on the other hand, many of those long Kimberly-Clark since, say, 2011, are sitting on gains that are especially big for just a dividend stock. If this describes your situation, nobody should blame you if you'd like to take some of those gains off the table. Of course, selling always depends on your personal situation, but at a premium of more than 11%, now may be a good time to prune your holdings of Kimberly-Clark.

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