Kimberly-Clark (KMB 1.28%) just ended a down year on a positive note. While the 2021 performance was "disappointing," as management admitted in late January, financial trends improved in the year's closing weeks. The business notched higher cash flow and began to lay the foundation for rebounding profit margins ahead.
These wins paint a mixed picture for investors over the next year as Kimberly-Clark tries to close the operating gap with rivals like Procter & Gamble (PG 0.68%). Let's take a closer look at that key matchup.
Image source: Getty Images.
Small wins
Sales trends continued to lag the wider market but are strengthening. Kimberly-Clark reported a 3% increase for the fourth quarter and a 1% decline for the full 2021 year. P&G, in contrast, recently announced a blistering 6% revenue spike on top of the prior year's 8% surge.
Kimberly-Clark is also getting more of its growth from price increases while P&G is achieving a balance between price hikes and rising volumes. "While our overall financial results were disappointing," Kimberly-Clark CEO Mike Hsu said in a conference call, "we took decisive action to offset the impact of higher costs."
Yet management was happy to highlight the improving market share trends that allowed the company to land at the high end of the growth outlook it issued back in late October. "We're encouraged by our top line performance and the way our teams executed in a very dynamic environment," Hsu said.
Cost hang-ups
The news wasn't as encouraging on the bottom line as soaring costs combined with supply-chain issues to push profits lower. Gross profit fell 14% and adjusted operating profit dropped to $611 million from $767 million a year earlier. Kimberly-Clark estimated that input costs jumped over $500 million in Q4, and that surge was only partly offset by rising prices.
KMB Operating Margin (TTM) data by YCharts
Profit margins have been a challenge for both companies. Operating profit at P&G is down to about 22% of sales from the recent high of 24% of sales. Kimberly-Clark's comparable metric has slumped to below 15% of sales.
The rebound plan
The path toward better results could require Kimberly-Clark to launch hit products in its paper towel, diaper, and tissue paper categories. P&G has demonstrated in recent quarters that consumers are happy to pay higher prices for premium products in these areas. Kimberly-Clark is having more limited success on this score but has an aggressive innovation plan for 2022 and beyond.
Its earnings rebound will depend on that growth success, and on management's ability to fix supply-chain bottlenecks while boosting prices. Management is optimistic. "We're expecting the margins to recover," CFO Maria Henry said.
In the meantime, shareholders have every reason to expect solid cash returns from holding this stock. In 2022, Kimberly-Clark will mark its 50th consecutive year of rising dividend payments, making it a Dividend King. Plus, the stock pays a solid yield today of about 3.4% compared to P&G's 2.2%. Cash flow is strong enough to support stock buybacks, too.
Investors must balance those positives against the likelihood that Kimberly-Clark will continue lagging its rival through most of 2022 before showing faster sales and margin rebounds later in the year. If you're looking for a big dividend, you might want to watch this business for concrete signs of a rebound over the next few quarters.
