Kimberly-Clark (NYSE: KMB) proved worthy of the Dividend King title in the last two years. The company struggled with volume declines and sluggish performance that caused analysts to cut sentiment, curb price targets, and cap the market for its stock. Fast forward to today, and the story has changed. Analysts are warming to the name and leading the stock to a new high. With this scenario in play, the upcoming earnings report will catalyze the market, potentially leading to a significant upside for this king of capital return.
The latest analysts' updates include a double-upgrade to Buy from Bank of America. Bank of America cut the stock to Underperform late last year on an expectation that the margin had peaked and business would contract more than it did. Two quarters later, the analysts at Bank of America are changing their tune because growth is back in the picture. The Q1 results have revenue down slightly compared to the previous year due to price and mix; the volume returned to growth and is expected to provide leverage and a wider margin as the year progresses.
Bank of America’s price target aligns with the high end of the expected range and suggests a double-digit upside and a new all-time high. Coincidentally, Royal Bank of Canada reiterated its Outperform rating and $165 target two days later.
Analysts Raise Estimates for Margin Widening Kimberly Clark
The forecast for Q2 and the year is mixed but includes margin expansion and a pivot to top-line growth in the back half. Analysts expect a 0.5% revenue decline in Q2 but expect adjusted earnings to grow. The gross margin expanded nearly 400 basis points in Q1 as organic growth and productivity improvement offset rising costs, and the strength is expected to continue through year-end. Earnings are forecast to rise by a nickel or 3% and to outpace revenue growth. Longer-term growth is expected to accelerate in fiscal 2025 as organic growth persists and the impact of divestitures drops out of the equation.
The stock price valuation is not a concern and is unlikely to alter the stock price trajectory, given the outlook for revenue and earnings. Trading at 19x earnings, valuation is in the middle of the range for consumer staples companies and provides some value relative to the S&P 500.
Kimberly-Clark has some risks related to the balance sheet, but they are receding and playing into the shift in analysts' sentiment. The company carries some debt and is moderately leveraged with long-term debt at 7.1x equity. The offsetting factor is that debt is falling, and the leverage ratio is down from over 8x at the end of last year. Cash flow is sufficient to sustain debt reduction and is expected to improve, so the leverage situation should continue to improve.
The cash flow and balance sheet allow for share buybacks. Repurchases are small but robust enough to offset dilution and reduce the count slightly in Q1, aiding the dividend growth outlook. It is unlikely that Kimberly-Clark will make robust distribution increases, but sustained increases in the low-single-digit range are likely, and the 3.45% yield is attractive enough.
Kimberly-Clark Analysts Resume Uptrend in Stock Price
Kimberly-Clark's price action has been range-bound since 2022 but never broke the stock’s uptrend. The market consolidation included a significant 25% correction, resulting in a trend-following signal still in play. The market is moving upward from a higher support level in 2024, with plenty of room to run.
The MACD and stochastic support the bullish outlook and upside potential, bringing the question of targets to mind. In this scenario, the first significant target is the $147.50 level, coincident with the 2022 high, and the next is at an all-time high. Because the analysts are leading to an all-time high and higher, a move above $160 may only be a matter of time.
