Inflation Is Here – Should You Buy This 3.4% Dividend Payer To Protect Your Retirement?
Over the last several weeks I’ve warned you that inflation is coming fast…
And it’s now officially here…
The Consumer Price Index (CPI) – measure of inflation – rose 0.9% from March to April… This is the fastest one month rise in inflation since 1981. And this is without food and energy prices.
With the so called “all items index” inflation rose 4.2% in the last year.
And it was even worse when looking at individual line items.
Vehicle prices rose 10% in April… This is the largest 1 month increase since this data began getting collected in 1953.
The total energy index saw prices rise 25.1% in the last year.
And gasoline prices rose 49.6% in the last year.
Yes, some of these yearly increases are because this time last year we were in full Covid lockdown mode.
But that doesn’t explain the huge month to month gains.
Why is this happening?
Because of the trillions of dollars the federal government keeps pumping into the economy.
This is giving people more money to spend… But the supply for pretty much everything is lower due to Covid related backlogs, shutdowns, and shortages we’re still dealing with.
And when you have high demand and low supply it leads to higher prices and rising inflation.
Historically, these numbers lag which means we will see even higher inflation in the months to come.
Especially since Biden and the Democrats want to spend another $2 trillion on infrastructure.
Inflation is a retirement portfolio killer that could literally wipe away your entire nest egg if things get out of control.
Today, I’m going to analyze one stock to see if you should buy it to protect your portfolio from inflation.
Kimberly-Clark (KMB) is one of the world’s largest personal care and tissue products manufacturers and sellers.
Some of its most famous brands are…
- And more.
During this pandemic, these brands helped Kimberly-Clark not only survive… But thrive while most companies flailed.
It grew revenue, profits, and cash flows during the worst economic situation we’ve seen since the end of World War 2.
And this strength pushed the company’s shares 19.5% higher in the last year.
But these powerful brands won’t just protect your portfolio in a downturn… They’ll also help your retirement portfolio fight inflation in two different ways.
- With its large dividend.
- With its ability to raise prices.
Today, I want to help you figure out whether you should buy it or not for your retirement portfolio. Especially now with the trillions of dollars already spent – and still proposed – is leading to higher inflation that could crush your retirement portfolio.
It’s based in Dallas Texas. It has a $45.8 billion market cap. And it pays you a large 3.4% dividend. Which is reason #1 to consider buying its stock.
Kimberly-Clark’s 3.4% Dividend
Over the last decade KMB’s paid out a total of $35.84 per share in dividends.
At today’s share count of 341 million shares that’s equal to $12.22 billion paid out to shareholders in that time.
It also grew its dividend 55.4% from $2.80 per share in 2011 to $4.35 per share now.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
And these will especially fight inflation.
Because its ever-rising dividends will continue to pay you more and more money every year… And these payments mean higher investment returns and income for your retirement portfolio.
And it will keep paying and raising these dividends because it’s one of only 65 prestigious Dividend Aristocrats on Earth.
These are companies that have paid and raised dividends for 25 straight years.
It’s now paid and raised its dividend for 49 straight years because of its enormous power… And when it raises the dividend next year it will become an even more prestigious Dividend King.
It can do this because it earns massive profits. Which is reason #2 to consider buying Kimberly-Clark for your retirement portfolio.
Kimberly-Clark Earns Massive Profits
Over the last decade it earned an average operating income margin of 14.3% per year.
I look for anything above 10% so this is fantastic.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 10% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
Kimberly-Clark farsurpasses both thresholds which means it’s a world class business operation.
But it gets even better because it can – and already has – raised its prices to fight its own rising costs of inflation.
Prices on most of Kimberly-Clark’s North American products will rise by the mid-to-high single digits, and consumers can expect to see most of the higher price stickers by late June. Impacted business segments include baby and child care, adult care and Scott toilet paper.
The above is via CNBC.
Few companies can raise prices without losing customers.
This competitive advantage is called pricing power and its enormous.
Not only because it keeps Kimberly-Clark revenues, profits, and cash flows higher… But also because this helps fight inflation too.
If it raises prices by 10% because its own costs rise 8% it automatically increases its margins by 2%… Without any additional costs.
This combination of raising prices and higher dividend payments every year makes Kimberly-Clark one of the best inflation fighters on Earth.
Another thing these huge profits allow is lowish debt levels.
Kimberly-Clark Has Lowish Debt Levels?
As of this writing KMB has $320 million in cash compared to $8.82 billion in debt.
As a percentage of its balance sheet total liabilities make up a high 97%.
Debt makes up only 19.3% of its market cap.
And its debt-to-equity ratio is a high 14.5.
I look for anything below 1 on this number.
These metrics show that Kimberly-Clark’s debt levels are higher than I would like. Which lowers the potential safety of owning this company to fight inflation.
However, it’s not enough to discard Kimberly-Clark yet because of its competitive advantages, powerful brands, and large profits and cash flows.
So far, KMB looks like a great stock… But what about its valuation? Is it cheap enough to buy?
Kimberly-Clark IS NOT Cheap…
With the markets at or near all-time highs you might expect a great stock like Kimberly-Clark to be selling at an enormous valuation.
Unfortunately, it is.
As of this writing its P/E is 20.1.
Its P/CF is 13.7.
Its forward P/E is 18.
And its enterprise value to operating income – EV/EBIT is 17.6
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that KMB is overvalued right now when considering all the metrics together.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With KMB being overvalued right now, its stock does not give you a large margin of safety.
Especially when you consider its high debt levels.
If you’re looking for a solid, safe, dividend paying, stable, inflation fighting, and enormously profitable investment to buy to earn high and safe returns for your portfolio – Avoid Kimberly-Clark until its cheaper and has lower debt.
And instead consider investing in one of the stocks below to protect your retirement during these uncertain times.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.
P.S. Breaking Poll – Is Your Portfolio Prepared For 1980’s Style Inflation? Vote Here