Kimberly-Clark and pulp prices

According to Seeking Alpha, Kimberly-Clark shares have been in a downtrend since peaking in August of last summer at a price of $160 per share. Shares are now trading around $132.

Long term shareholders of Kimberly-Clark may not be overly concerned about fluctuations in the share price as Kimberly-Clark has continuously paid out a generous dividend over the years. They buy back shares year after year as well.

The dividend for the past 12 months has been $4.28, and its forward dividend is expected to be $4.56 putting the yield at about 3.48% at the current share price.

Kimberly-Clark is a large company with a market cap of about $44 billion. Full year sales revenues for the most recent 4 quarters were $19.14 billion. There are 3 main business segments: Personal care; Tissue; and its AFH brand called K-C Professional.

Kimberly-Clark has a large portfolio of legacy brands such as: Scott Tissue paper, Huggies diapers, and Kleenex. They sell in 175 countries but get more than half their revenue in North America.

The franchise value of the brands affords Kimberly-Clark a tremendous competitive advantage, sometimes referred to as a moat, around its product line. They can afford to charge a slightly higher price than competitors knowing that their trusted brands will still want to be bought. That franchise value is the intangible value behind Kimberly-Clark’s $44 billion market cap.

Profit margins can be volatile for several reasons. If there is one factor that stands out as the most volatile factor to profit margins, it is the price of pulp. Pulp, which comes from wood chips and waste paper, is the main raw material used to make toilette paper, paper towels and tissue paper.

Management has already warned of surging higher commodity costs in the 4th quarter and up to date. They warned that the increase in raw material costs would contribute to between $450 million and $600 million in additional input costs.

“Commodities were favorable by $175 million in 2020, although they turned inflationary in the fourth quarter. We’re planning for commodity inflation of $450 million to $600 million in 2021. Costs are projected to increase broadly in most areas, including pulp and recycled fiber, resins, superabsorbent and distribution expenses,” the company’s CFO, Maria Henry, said this about commodity prices in their recent conference call.

Commodities were favorable by $175 million in 2020, although they turned inflationary in the fourth quarter. We’re planning for commodity inflation of $450 million to $600 million in 2021. Costs are projected to increase broadly in most areas, including pulp and recycled fiber, resins, superabsorbent and distribution expenses.

Seeking Alpha shared a very long-term chart of Kimberly-Clark shares. Notice that during the years from 2000-2011, the share price was dead in the water. This, as the price of pulp was in a bull market hindering margins and profits.

From 2011 to recently, as wood pulp prices entered into a bear market, both the profit margins and the share price have done very well.

Investors should pause here and take caution that there is good reason commodity prices could be in for another long term bull market. Demand from China and a weaker US Dollar could play a role in higher wood pulp prices.

Looking forward, and this is all to be seen, but higher than expected pulp costs could be a factor that has contributed to the decline in the share price since August. Margins are already high so there is ample room for margins to get squeezed on higher input costs from wood pulp if prices end up surging more than expected.

Kimberly-Clark is a company that would not benefit from higher commodity prices, inversely, they would be hurt by them.

Read the full text with the author’s considerations and graphics on the Seeking Alpha website.