The recent surge in the stock market has evoked a mix of excitement and apprehension among investors. While rising investment values typically bring joy, indicators such as the Shiller P/E ratio, which are nearing historic highs, have led to fears of an impending bear market or even a market crash.
While predictions about a potential crash remain uncertain, one consumer staples stock stands out as a safer option during turbulent times: Kimberly-Clark.
Known primarily for its Kleenex tissue brand, Kimberly-Clark has a diverse portfolio that includes well-regarded names such as Huggies, Depend, Cottonelle, and Scott. Investors often gravitate toward companies that provide essential consumer products, especially during economic downturns. As a result, Kimberly-Clark’s stable business model positions it well to weather difficult market conditions.
In a recent strategic move, Kimberly-Clark announced its intention to acquire Kenvue, the former consumer health division of Johnson & Johnson. This acquisition will incorporate popular brands like Neutrogena, Tylenol, and Listerine into Kimberly-Clark’s offerings, further strengthening its resilience in challenging economic times.
However, the market has reacted skeptically to Kimberly-Clark’s plans, particularly due to the significant financial implications of the $48.7 billion merger. In fact, the stock has fallen over 30% from its peak in June, a downturn likely fueled by concerns about share dilution resulting from financing the Kenvue purchase.
Despite this volatility, the stock is currently priced at $97.35, reflecting a 1.78% increase for the day. With a market cap of $32 billion, its price-to-earnings (P/E) ratio stands at 15, considerably below its five-year average of 22, while the forward P/E ratio is even more attractive at 13. This suggests that the potential for further decline may be limited, making it more appealing to investors looking for stability.
The decline in stock price has also led to an increase in the dividend yield, now at 5.2% compared to an average of 1.1% for the S&P 500. Kimberly-Clark, known as a Dividend King, boasts a remarkable streak of 54 consecutive years of dividend increases. Even though the dividend has cost the company $1.67 billion over the past year, it remains sustainable, as it represents a substantial portion of its free cash flow.
For investors concerned about a market downturn, Kimberly-Clark presents an attractive option. Its essential products are likely to continue selling well irrespective of economic conditions. Moreover, if stock prices remain depressed, investors can still benefit from a solid cash yield while awaiting recovery and potential dividend hikes.
Despite potential concerns surrounding the Kenvue merger and necessary share dilution, the substantial decline in stock price seems to have already factored in much of the risk. Given the current low P/E ratios and robust dividend outlook, investing in Kimberly-Clark could be a prudent strategy for those anticipating market volatility.
