Kimberly-Clark (KMB) is one of 52 dividend aristocrats that has provided reliable income increases for decades. In this article, we analyze KMB’s dividend, evaluate the company’s competitive advantages, and review some of the key challenges facing the business.

We believe that KMB has one of the safest dividend payments you can find, but we would like to see a better price to add the stock to our Top 20 Dividend Stocks or our Conservative Retirees dividend portfolio.

Like many other large consumer brand multinationals, KMB is battling foreign currency headwinds, slower growth in developed markets, and an evolving competitive landscape in higher-growth emerging markets.

Business Overview

KMB has been in business since 1928 and has grown into one of the largest global manufacturers of various tissue and hygiene products. Some of the company’s key products are disposable diapers, training pants, baby wipes, incontinence care products, tissues, toilet paper, paper towels, napkins, and more. KMB’s major brands include Huggies, Pull-Ups, Kleenex, Cottonelle, Kotex, Scott, and Depend. Products are primarily sold to supermarkets, mass merchandisers (Walmart is a 13% customer), drugstores, and other retail outlets. About half of KMB’s operating profits are derived in North America, and the company gets over 30% of its sales from emerging markets.

Business Analysis

Few businesses have survived for as long as KMB has. The company’s size, financial strength, and presence in mature, slow-changing markets make it very difficult to disrupt.

KMB’s scale allows it to manufacture its products on a very cost-effective basis. However, the company’s marketing campaigns and brand equity are arguably its strongest advantages.

The company spent $767 million on advertising last year, and retailers have few reasons to change the products they choose to promote. There is only so much shelf space for the types of products KMB sells, and retailers only want brands that will sell quickly. They have little incentive to do business with new entrants if their current mix is generating strong results and supported by the massive marketing budgets of companies like KMB. Not surprisingly, it is very challenging for potential new entrants to break into the distribution channels that KMB enjoys.

KMB’s marketing budget also allows it to respond aggressively to smaller players’ efforts to compete on price or release an innovative new product. KMB can outspend them and quickly redirect its R&D to eliminate most threats. The mature nature of the tissue and hygiene markets only adds to the challenges new entrants face.

Product use cases in these markets hardly change over time (e.g. diapers will continue doing the same job with only incremental technology improvements, such as better sealing), reducing the number of opportunities other players have to capitalize on trends KMB might not have recognized. Consumption patterns are also pretty stable, further limiting the potential for disruption.

All of these factors have combined to help consolidate many of the markets KMB operates in. For example, KMB has roughly half of the U.S. disposable diaper market, with Procter & Gamble (PG) being the other major player. Brand loyalty, large marketing budgets, continuous product innovation, and proven sales success across many retail customers provides incumbents with numerous competitive advantages and historically favorable pricing power in many markets. As seen below, KMB has enjoyed a high and stable return on invested capital over the past decade:

Source: Simply Safe Dividends

Continued efforts to cut costs and improve production efficiencies will help maintain high margins as well. KMB’s FORCE (Focused on Reducing Costs Everywhere) program has instilled a cost reduction mindset in the company’s culture and resulted in several hundred million dollars of cost savings in each of the last five years.