Campbell Soup, Kimberly-Clark, and Procter & Gamble: Are Their Dividends Sustainable?

Companies that pay dividends can provide income during retirement and offer tangible rewards while you're waiting for share prices to rise. Of course, you don't want to invest in just any business that pays a dividend. Focus on businesses with the potential for longevity and the free cash flow to serve as a basis for ongoing dividend yields. Let's take a look at food manufacturer Campbell Soup (NYSE: CPB  ) and personal care product companies Kimberly Clark (NYSE: KMB  ) and Procter & Gamble (NYSE: PG  ) .

Will soup nourish your portfolio?
Campbell Soup sells the iconic namesake soup product line along with products such as Bolthouse Farms organic juices. As of this writing, Campbell Soup pays $1.25 per share per year and yields 3% in dividends annually. Last year the company paid out 53% of its free cash flow in dividends, meaning that this dividend resides in the safe range for now, leaving cash for future product innovation and acquisitions.

Kleenex, anyone?
Personal care products company Kimberly-Clark sells products such as facial tissue, shop towels, and baby diapers under the brand names of Kleenex, Shop Towels, and Huggies, respectively.  It also caters to the health care and commercial markets. Currently this company pays $3.24 per share per year and yields a whopping 3% annually. Kimberly Clark paid out 55% of its free cash flow in 2013, meaning the dividend is relatively safe. 

"Cleanliness is next to godliness"
Another personal care products company, Procter & Gamble, sells some of the most well-known brands in the world, such as Bounty, Tide, and Duracell. Last year, Procter & Gamble paid out 60% of its free cash flow in dividends. Currently, P&G pays $2.41 per share per year in dividends, yielding 3%.

Will the dividends keep coming?
In the most recent quarter, Campbell Soup turned in some lousy numbers. Overall, quarterly sales and net income declined 2% and 30%, respectively. Only two segments, its Global Baking and Snacking unit and the Bolthouse and Foodservice businesses, saw increases in revenue but didn't do enough to lift overall revenue and earnings. Campbell Soup's CEO, Denise Morrison, blamed the weaknesses on slow movement at the retail level, a "late Thanksgiving holiday," and increased marketing expense. Slow retailer inventory implies a fundamental slowdown. If the increased marketing expense doesn't translate into increased sales and profitability over the long term, then the dividend will suffer. Campbell's acquisition of Plum Organic last year will boost its presence in the organic children's food market, allowing it to capitalize on the healthy lifestyles movement. Campbell also announced last year that it will join up with Green Mountain Coffee Roasters to bring you soup from a coffee machine in 2014.  

Kimberly-Clark recently released its results for 2013, and this company fared a little better. Quarterly reported sales remained roughly even with 2012. Lower costs helped enable an increase in net income of 102% in the most recent quarter. Kimberly-Clark probably faces market saturation. Company executives realize this and plan to spin off its high-potential health care business. Its health care segment increased 2% and represented one of only two segments that increased sales in the most recent quarter. The professional segment also increased at a rate of 3%. 

Procter & Gamble represents another company that faces market saturation. Sales in the most recent quarter were even with the same time in the previous year. While selling, general, and administrative expenses declined 3%, cost of goods sold and interest expense increased 2% and 11% respectively contributing to a decline of 16% in net income in the most recent quarter. Health care also represented the highest source of growth with reported sales increasing 4% in that segment in the most recent quarter. 

Foolish takeaway
On the whole, Campbell Soup faces fundamental degradation specifically in its Simple Meals and Beverage categories, which encompass its more traditional products such as soup and V-8 juices. Its only strength currently lies in snacks and the "organic" Bolthouse products. Investors may want to stay on the sidelines to see if Campbell's executives can turn things around. Otherwise, this company's dividend yield of 3% may not last.

Kimberly-Clark possesses the greatest potential of the three companies listed, as this company's effective cost control and the strategic proposal to spin off its highest-potential health care segment will most likely reward shareholders with continued dividend and capital gains increases. Procter & Gamble probably needs to focus more on its cost control; however, by and large this company possesses a strong portfolio of brands that will sustain the company and its dividend for years to come. However, expect low top- and bottom-line growth over the long-term. Feel free to put these companies on your Motley Fool Watch List and do research to decide their investment-worthiness.

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