Kimberly-Clark Investors In Need Of A Tissue

High-Yield Kimberly-Clark Falls Back On Weak Results

Kimberly-Clark NYSE: KMB bucked the Q2 earnings trend by reporting weaker-than-expected earnings and guiding the market lower. This news has shares down more than 3% in early trading and they may move lower. While the results and outlook aren't good, the company is still in fine shape and capable of paying Its near 3.5% yield. Based on the company's 48-year history of dividend increases we're still expecting a 49th increase at the end of the fiscal year with only one caveat for investors. With revenue and earnings under pressure, the next dividend increase may not be very large. Between now and then, investors may have a chance to buy this blue-chip consumer staple company at a much better valuation.

Kimberly-Clark Misses The Mark

Kimberly-Clark reported a poor quarter and one impacted by two significant headwinds. On the one hand, consumers are working their way through inventory built up over the last year while on the other, rising input prices are cutting into profits. The company reported $4.72 billion in net consolidated revenue for the quarter which is up 2.4% from last year but missed the mark by a full 100 basis points. What's worse, in our view, is that revenue is flat to slightly down sequentially and only up 2.8% over the past two years and 2.6% over the past three years. What this tells us is that revenue has been mostly flat with intermittent periods of growth and decline. 

On an organic basis, the company's sales shrank 3% on a 4% decline in volume offset by a 1% increase in price and mix. The decline in organic sales was offset by a 2% tailwind from acquisitions and a 3% tailwind from foreign exchange that we see aiding the company in future quarters as well. On a segment basis, strength in Personal Care Products and KC Professional was offset by weakness in the Tissue segment. Personal Care Products increase by 13% and KC Professional by 6% while Tissues shrank by 13%, the echo effect of last year's pantry loading craze.

Moving down the report, the details only get worse. The company experienced a significant contraction in margins due to rising input costs related to pulp, freight, and labor. The GAAP EPS of $1.19 not only missed the target by $0.52 but it is down 40% over the past year. On an adjusted basis, the $1.47 in earnings missed by a quarter dollar and is down 33% from last year and that's not where the bad news ends.

Kimberly-Clark updated its guidance for the year citing declining sales volumes and rising inflationary pressures as the primary driver. The company is expecting full-year adjusted earnings per share in the range of $6 to $6.50 versus the $7.30 predicted by the analysts. The detail that makes the guidance especially painful is that the company has also announced intentions to raise prices to offset what it describes as “significantly higher input costs”.

Don't Expect A Big Dividend Increase From Kimberly-Clark

Kimberly-Clark’s revised guidance cast a new light on the dividend. The company's payout ratio is going to run near 75% at the low end of the range with a chance for slightly better results if performance is better than expected. The real catch is that cash flow and free cash flow are down more than 50% over the past year raising red flags on the balance sheet. The company’s not in serious trouble but free cash flow is tight and leverage is moderately high. We're not expecting the dividend to be cut or suspended but we do not expect to see anything resembling a robust dividend increase this year.

The Technical Outlook: Kimberly-Clark Might Be Heading Much Lower

Kimberly-Clark is down hard in early action but appears to be above support right now. The caveat is that this support level is a very key level that dates back for several years. If price action falls below the $130 level we could see a full retracement of the post-COVID rally with a potentially bigger move in the cards.