5 Things Kimberly-Clark Management Wants You to Know

Here are five keys from Kimberly-Clark's most recent quarterly conference call.

Bob Ciura
Bob Ciura
May 13, 2015 at 8:00AM
Consumer Goods

Kimberly-Clark products are in tens of millions of homes. Source: Kimberly-Clark.

Consumer products giant Kimberly-Clark Corp. (NYSE:KMB) turned in mixed results when it reported quarterly earnings on April 21. The company behind Kleenex and Huggies beat analyst expectations on earnings, thanks to strict cost controls and lower raw materials costs, but it missed on revenue because of the strengthening U.S. dollar.

Nevertheless, the stock jumped 5% after reporting. Here are five insights from Kimberly-Clark's conference call with analysts that investors should know about.

Strong dollar weighs Kimberly-Clark down

Let's start with some headlines. First we achieved organic sales growth of 5%. It was highlighted by 11% growth in developing and emerging markets. Second, we delivered strong cost savings, margin improvements and growth in adjusted earnings per share. And third we continue to allocate capital in shareholder-friendly ways. -- Mark Buthman, CFO

The biggest headwind facing Kimberly-Clark is the rising U.S. dollar. A strong domestic currency is typically a sign of a strong economy, but for large, multinational corporations, it's a double-edged sword. That's because sales conducted overseas are worth less when they are converted back into U.S. dollars.

Unfavorable currency fluctuations shaved a full nine percentage points off revenue last quarter. Because of this, Kimberly-Clark's net revenue fell 4%, even though organic revenue actually grew 5%. Organic revenue strips away currency fluctuations, and is a good indicator of a company's true underlying health. That's why management focused on organic growth on the conference call, because it knows that foreign exchange movements are often transitory.

Emerging markets are the next frontier

Organic sales in diapers rose high-teens in (developing and emerging) markets as we continued to benefit from innovation, expansion of the diaper pant and category development overall.. -- Thomas J. Falk, Chairman and CEO

Despite the currency issue, Kimberly-Clark isn't deterred from investing in new markets. Since organic growth and underlying demand remain strong, the company isn't backing down from aggressive growth into emerging markets. This makes a lot of sense, of course, since these under-developed nations represent great opportunities for growth.

The biggest growth driver is in Kimberly-Clark's Personal Care segment, specifically diapers, as management outlined above. Organic sales of diapers soared 55% in Eastern Europe, 35% in China, and 15% in Brazil last quarter.

Cost cuts in FORCE

We delivered $90 million of FORCE cost savings and we are off to a very good start relative to our full year target for savings of at least $300 million. In addition our organizational restructuring is on track and generated $10 million of savings in the quarter.. -- Buthman

The main reason Kimberly-Clark beat analyst expectations on profit is because the company is aggressively cutting costs through a program called Focus On Reducing Costs Everywhere, or FORCE. Because of the savings mentioned, Kimberly-Clark's adjusted gross margin clocked in at 35.6% last quarter, an increase of 140 basis points year over year. The company saw savings across general and administrative functions, but also benefited from the plunge in commodity prices.

Kimberly-Clark saved $10 million just last quarter from lower commodity prices, which represented the first quarter in more than two years that the company benefited from commodity cost deflation. Combined, these savings will help Kimberly-Clark to continue beating analyst expectations, even if currency woes persist.

Product innovation

On the innovation front in North America, we introduced improved Huggies baby wipes, we started shipping new Poise pads and Depend briefs. -- Falk

It may come as a shock that it's even possible for a consumer staples company to innovate, but that's what it takes to stay atop any industry. Kimberly-Clark is no different, and the company is preparing significant relaunches of some of its core brands to invigorate sales momentum.

For example, last quarter, Kimberly-Clark relaunched its flagship Huggies brand Snug and Dry diapers. The efforts include a new marketing campaign, as well as significant product upgrades that were on track to hit store shelves in 80% of Kimberly-Clark's retail outlets by late April.

Dividend remains secure

We continue to provide a top-tier dividend payout among our peers. -- Buthman

Of paramount importance to investors is clearly the safety of the dividend. Kimberly-Clark is one of the premier dividend growth stocks. The company holds an amazing track record, having increased its payout for 43 years in a row. This includes a nearly 5% dividend hike this year. While that was lower than its dividend increases in recent years, due to the brutal currency headwind, it's notable that the company was able to still increase its dividend above inflation.

That is a clear show of strength, that the company can continue to reward shareholders, through thick and thin. At its recent stock price, Kimberly-Clark yields a juicy 3.2% dividend yield, which is significantly above the stock market average of approximately 2%.

The Foolish bottom line
Kimberly-Clark's headline numbers look weak right now, because the rising dollar is weighing significantly on growth. But the company remained highly profitable last quarter, and underlying growth was impressive, particularly in the emerging markets.

Even though revenue is in decline, there's no need for concern about the dividend. Kimberly-Clark earned $1.27 per share last quarter, which more than covered its $0.88 per share dividend. And, shortly after reporting earnings, Kimberly-Clark declared its most recent quarterly dividend on schedule.

While Kimberly-Clark isn't likely to excite growth investors, its slow-and-steady nature and high yield should be very attractive for income investors.