Berko: Kimberly-Clark not a wise investment
Friday, February 01, 2013 7:00 AM
Dear Mr. Berko:
I’m 41 and divorced with two children. And thanks to my super dad, I’ve had a great job for 11 years, with excellent benefits and a very good retirement plan. I have an individual retirement account worth $109,000, consisting only of stocks you have recommended in the past eight years. I got a good bonus this year, and my dad, who retired from Kimberly-Clark, recommends I buy 100 shares of that corporation. What do you think?
B.R., San Antonio
I can’t imagine a more wonderful, fulfilling, loving and caring relationship than one between a father and daughter. If you want to keep it that way, don’t follow his investment advice.
In the state of Texas, there isn’t a better example of a white-bread company with quintessential white-bread management than Kimberly-Clark Corp. (KMB-$89.51). KMB is Old Navy, golden retrievers, “Leave It to Beaver” and a fixation on lawn care, bad chardonnay, equally bad espresso, golf, soccer moms and SUVs. For too long, this company has been run by a fraternity of fallow managers with a collective 12 handicap who play at the “vetty vetty” Preston Trail Golf Club in Dallas.
Can you believe a company that sells brands such as Kleenex, Huggies, GoodNites, Kotex, Pull-Ups, Cottonelle, Depend and Scott only grew revenues from $14.2 billion to $21 billion between 2001 and 2012? In those dozen years, KMB increased prices by 40 percent, so this 50 percent revenue growth is practically meaningless. During that time frame, earnings were as flat as flapjacks, and profit margins fell 25 percent, definitely a testament to constipated management. The dividend tripled, and corporate debt doubled -- while KMB spent $7 billion to repurchase 150 million shares of stock.
Reducing the number of outstanding shares by 30 percent is a shady accounting scam that proportionately increases earnings per share and deceptively makes management look good, allowing those in management to maintain their cushy jobs. The $7 billion management spent on stock buybacks was a terrible waste of shareholder money, which would have been better used developing new products, improving marketing and acquiring cost-saving equipment.
That the shares trade only a few points higher than they did in 2000 suggests Kimberly’s white-bread management team can’t figure how to pour water from the toe of a boot with instructions printed on the heel. KMB’s new direction, a program cleverly named FORCE (Focus on Reducing Costs Everywhere), is supposed to grow profits by reducing costs. Management and the board of directors are so enthralled over FORCE that some are emerging from their office caves and gathering in circles like excited Neanderthals who just discovered fire. But the major reason for FORCE is that Vanguard Group, which owns 30 million shares, and a committee of disappointed and prominent shareholders had “come to Jesus” meetings with management. And KMB’s white-bread boys -- fearful of losing their rich sinecures, their community status, their personal perks and their corporate jets -- may have seen the light. Time will tell.
KMB is not just Huggies, Depends and other personal stuff. Its 53,107 employees also produce billions of dollars of medical devices, infection prevention products, operating room medical supplies, pain management systems, feeding systems, liquid and air filtration systems, and various supporting products. The consensus believes that revenues will grow 2 percent in 2013, to $21.4 billion, that earnings will increase 6 percent, from $5.22 to $5.58 per share, and that the dividend will increase 4 percent, from $2.96 to $3.08, plus modest gains in the following years. However, if Messrs. Falk, Buthman, Abernathy and Mielke (KMB’s four hotshots) fail to deliver traction, these pretty boys and their sycophants may have to pay their own club dues at Preston Trails -- because corporate rigor mortis may have set in after a decade of slovenly management. It may be too late. Morningstar seems to agree and gives KMB only two stars out of five. Put your bonus money in 30-year Treasury inflation-protected securities.