Kimberly-Clark (KMB +1.38%) is a Dividend King, with over five decades of annual payout increases backing the stock's attractive 5% yield. Income investors interested in this consumer staples giant, however, have to consider not just what the company does well today. That's because a pending acquisition is likely to have a significant effect on its future. Let's dive in.
What does Kimberly-Clark do?
Kimberly-Clark is focused on products that use wood pulp in some manner. Its portfolio includes toilet paper, tissues, feminine hygiene products, diapers, and adult incontinence products. You likely know of, if not use, some of the company's key brands, like Scott, Kleenex, Huggies, Kotex, and Depends.
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The company is a leader in the consumer staples sector, with a global reach. It can stand toe-to-toe with any competitor in terms of its production, distribution, marketing, and innovation capabilities. The 53-year streak of annual dividend increases is clear evidence of its ability to hold its own in a highly competitive sector.
However, Kimberly-Clark isn't the fastest-growing business around. Its stock usually trades at a discount to faster-growing peers like Procter & Gamble. Today, for example, Procter & Gamble's dividend yield is 3%, while Kimberly-Clark's is nearly 5%, and its price-to-earnings ratio is 17 compared to nearly 21 for Procter & Gamble.
To add to the headwinds, Kimberly-Clark is also facing significant challenges in key product categories, including declining birth rates in the diaper market. It also lacks some of the diversification of Procter & Gamble, which has exposure to categories such as soap, deodorant, and toothpaste.
Management and the board of directors have been looking for ways to boost growth for years. The opportunity may have arrived in the form of Kenvue (KVUE +1.34%).
An opportunity and a risk
Kenvue was the consumer products division that was spun off from Johnson & Johnson. This allowed the latter to focus on its higher-growth medical device and pharmaceutical divisions.
Kenvue owns some iconic brands, including Band-Aids, Listerine, and Tylenol, among many others. Unfortunately, the newly independent company has gotten off to a rough start, with revenue and earnings trending weakly. The stock price has been weak, too, leading Kimberly-Clark to step in to acquire Kenvue.
NASDAQ: KMB
Key Data Points
This is a big acquisition in more ways than one. The price tag is $48.7 billion. Given that the company's debt-to-equity ratio is 5.4 compared to Procter & Gamble's 0.7, taking on additional debt with a big acquisition is a bit risky. Kimberly-Clark covers its interest expenses 10 times over, while Procter & Gamble's interest coverage is 22. Investors need to pay extra close attention to leverage at Kimberly-Clark.
At the same time, however, the acquisition of Kenvue will dramatically change the company's business. Before, it competed directly with Procter & Gamble in paper products. Now, it will also compete in consumer products. This move will raise the bar for the company in a big way, as it moves from sixth place in the industry to the No. 2 spot directly behind Procter & Gamble.
If it can get Kenvue's growth back on track, the acquisition could provide dividend investors with an attractive yield and faster growth. Essentially, this Dividend King could set you up for a lifetime of reliable income and strong capital gains, if investors afford it a valuation more in line with that of Procter & Gamble.
Execution will be the key to success
The opportunity presented by Kimberly-Clark's pending acquisition of Kenvue is attractive. However, given the company's high leverage and the risk that the integration process may not go well, it is probably most suitable for more-aggressive investors. Execution will be the most important factor, and it may take several years before we know if the acquisition was a success or a failure.
