Kimberly-Clark: Investing in a Dirty Business

From the title of this article, you might think that I'm recommending a “sin stock.” While I generally like sin stocks (particularly tobacco stocks) as long-term investments, today's recommendation has nothing to do with vice. It is certainly a dirty industry, however, and one that stands to make record profits in the years ahead.

So, what might this dirty business be? I'll give you some hints. It's something used by millions of Americans multiple times per day, and an estimated four million new users will be added in 2010.

I'm talking, of course, about disposable diapers.

NEW BOOM

With the focus in recent years on the precarious state of the economy, most investors are not aware that American births are near all-time highs—even greater than during the post World War II baby boom. There is a New American Baby Boom underway, driven by the children of those original Baby Boomers —the Echo Boomers—who are now becoming parents themselves by the millions.

INELASTIC DEMAND

The diaper industry is unique in that it is driven almost entirely by demographic trends. During a rough economy, some families might opt for traditional cloth diapers or cheaper generic brands. But for most parents, a box of Huggies or Pampers is a luxury that they simply cannot live without.

According to the Clean Air Council, Americans throw away 570 diapers per second and 49 million diapers per day. Given the number of Americans entering their peak child bearing years in the next five years, I see these numbers only increasing.

THE STOCK

Dallas-based Kimberly-Clark Corporation (KMB) is the second largest producer of diapers in the world after Procter & Gamble though its iconic Huggies brand familiar to all American parents.

Kimberly-Clark is not what most investors would consider a “growth” stock.

It's a conservative consumer staple stock, selling well-known brands such as Pull-Ups, Kleenex, Scott, Kotex, Depends, and most importantly, Huggies. The company's brands are sold in more than 150 countries and hold the number one or number two market share positions in more than 80 countries.

This is exactly the kind of stock I like for this economic climate. Kimberly-Clark sells products that are highly predictable based on demographic trends. Perhaps most importantly the stock is reasonably priced, trading at a price/earnings ratio of only 13 and a dividend yield of 4.1 percent.

For income-oriented investors, what makes more sense today: to buy a “safe” 10-year Treasury note that yields 2.5 percent from the debt-plagued U.S. government or to buy the shares of a premier global consumer products company that yields 4.1 percent and also offers the potential for continued dividend growth? The company actually raised its dividend in both 2008 and 2009—two of the worst years in American economic history.

Given its brand diversity, Kimberly-Clark is not a pure play on the New American Baby Boom, but it is close enough for our purposes. Sales of Huggies diapers represent roughly one fourth of the company's total revenues of $19.6 billion.

THE TRADE

Buy shares of KMB at market. Enjoy an income stream better than what can be found in the bond market while profiting from the New American Baby Boom. Sell in two years or after a total return of 50 percent.

Stop loss: Sell if the price falls below $58.

This article originally appeared in SFO Weekly

Charles Lewis Sizemore, CFA

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