Tech stocks got knocked around this week, and suddenly boring looks beautiful again.
One of the most boring businesses on the planet, the one behind the diapers and tissues in your cupboard, just beat earnings early and stood by its full-year plan. Today we break down why the stock still looks underpriced.
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The Diaper Giant Paying You Nearly 5% to Wait Just Beat the Quarter
Kimberly-Clark (NASDAQ: KMB) recently traded around $104, and even after this week’s pop, it sits a long way below its 52-week high. Odd place to find a company that just beat expectations, stood by its outlook, and has raised its dividend for 54 straight years.
The market has spent months treating this stock like a problem child. A giant acquisition rattled Wall Street, sales growth went soft, and the shares got tossed into the “dead money” bin. Then the quarter showed up early and ahead of forecasts. That’s your cue to take a second look.
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What Just Happened
The early beat
Kimberly-Clark released preliminary third-quarter results, and they cleared the bar the Street had set. Adjusted earnings came in at $1.70 a share, ahead of forecasts. Sales slipped a touch, but analysts had braced for a bigger drop, so even the top line counted as a win.
The stock jumped nearly 5% on the news. That sounds tame until you remember who we’re talking about. Kimberly-Clark barely flinches when the whole market lurches. A move like that is the stock equivalent of the quietest person in the office standing up to applaud.
What management expects next
Management left its full-year outlook untouched. Adjusted operating profit is still set to grow at a mid-single-digit pace in constant currency, and adjusted earnings from the businesses it’s keeping are on track for high-single-digit growth.
The all-in earnings figure is expected to dip slightly, but the core business is doing exactly what you want it to do.
The soft spot is organic sales, which are trailing the categories Kimberly-Clark competes in. Management pinned most of that on social media disruptions in China. That’s a local hiccup. People didn’t stop buying diapers.
Full results arrive early next month, and this early peek just took most of the suspense out of them.
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The Deal Wall Street Feared Is Almost Done
Why the stock got dumped
Kimberly-Clark is buying Kenvue, the company behind Tylenol, Listerine, and Neutrogena. When the deal was announced, management warned it could dilute earnings in year one, and the market did what markets do. It sold first and planned to ask questions later.
Some on the Street think that warning was far too cautious. Their models show the deal adding to earnings in year one and delivering low-double-digit accretion in year two, before counting a single dollar of sales benefits.
Management is targeting more than $2 billion a year in savings and extra profit from putting the two companies together. The fear is priced in. The upside isn’t.
The hurdles keep falling
The deal keeps clearing obstacles. European regulators granted conditional approval, and Kenvue’s bondholders signed off on swapping their notes into Kimberly-Clark debt in big numbers.
That sounds dull. It’s also a vote of confidence from people who get paid to worry about what could go wrong.
Management says the deal is on track to close by year-end. Once it does, the biggest cloud over the stock turns into a closing date and an integration plan.
Overhangs like this rarely drift away slowly. They tend to lift all at once, and you want to be holding the stock when that happens.
A Smaller Company With Fatter Margins
Doing more with less
Here’s a stat the bears like to skip. Kimberly-Clark’s revenue shrank over the past few years as it sold off businesses, yet its gross margin climbed by nearly six percentage points over that stretch. Put simply, it trimmed the low-quality stuff and kept the brands people pay up for.
That’s the payoff from Powering Care, the company’s multi-year productivity overhaul. One recent quarter did get a boost from a tariff refund, so don’t extrapolate that particular bump. The underlying trend has been building for years, and it doesn’t depend on refunds.
Brands you buy on autopilot
Huggies, Kleenex, Cottonelle, Scott, Depend, Kotex, Pull-Ups. You don’t comparison shop for these when the economy wobbles.
You toss them in the cart without a second thought. Kimberly-Clark holds the No. 1 or No. 2 spot in its categories across dozens of countries, and shelf dominance like that doesn’t evaporate in one soft quarter.
The company has also strung together ten straight quarters of volume-plus-mix growth. In plain English, shoppers keep buying more of its products, and more of the profitable ones. Sales growth looks sluggish on paper, but the engine underneath keeps turning over.
The Yield Does the Heavy Lifting
Fifty-four years and counting
Kimberly-Clark has raised its dividend every year for 54 years, including through every recession of the past two decades. At recent prices, that works out to a yield near 5%. Procter & Gamble pays under 3%. Colgate-Palmolive pays under 2.5%. Same aisle, very different paycheck.
Management has every reason to guard that streak, and it has already shown it will make trade-offs to do it. Share buybacks got scaled way back so the dividend could keep climbing. When a company puts your income check ahead of financial engineering, you know whose side it’s on.
Priced like a bond, built like a brand
The valuation gap tells you this selloff overshot. Kimberly-Clark trades at a lower earnings multiple than Procter & Gamble and at a little over half of Colgate’s. Its forward multiple sits in the low teens, which is utility territory for a company with global brand power.
The average analyst price target sits 10% above where the stock trades, and at least one fair value model puts it in the high $130s. Stack the yield on top of that and the math gets friendly in a hurry. If the Kenvue integration goes smoothly, that gap has plenty of room to close.
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One Number You Should Treat Carefully
The scary number making the rounds is the payout ratio. Measured against GAAP earnings, Kimberly-Clark is paying out basically everything it earns as dividends.
That headline gives income hunters the jitters, and it’s the main reason the bears say the streak is on borrowed time.
Look closer and the picture changes. GAAP earnings are being dragged down by restructuring charges and deal costs tied to Kenvue, and those are one-time hits that fade once the deal is done.
Against adjusted earnings, the payout ratio drops to the high 60s, a comfortable level for a staples company. Free cash flow coverage is tighter, so keep an eye on it, but this dividend isn’t hanging off a cliff.
What Could Trip It Up
The balance sheet is already stretched, and Kenvue piles more debt on top. If borrowing costs stay high or the savings show up slower than planned, management has less wiggle room, and dividend raises could stay small for a while.
Integration is a big test. Merging two consumer giants with sprawling brand portfolios is hard, and mega-mergers in this sector have a mixed record of delivering the promised savings. Any stumble hands the bears fresh ammunition.
Trading down is the slow-burn risk. If shoppers keep reaching for store brands while the economy stays choppy, volumes could slip, and the organic sales gap could widen beyond the China issue.
My Take
The market priced Kimberly-Clark for a botched acquisition and a broken dividend.
What it’s getting instead is an early earnings beat, a reaffirmed outlook, margins well above where they sat a few years ago, and a deal that keeps clearing its hurdles. All while paying you close to 5% a year to sit tight.
I’d buy it here. You’re getting a defensive compounder at a discount to its major peers, with a clear catalyst in the Kenvue closing and an income stream that keeps growing.
The thesis breaks if integration goes off the rails or management has to freeze the dividend. If the stock breaks and holds below $92, the bottom of its 52-week range, reassess.
Entry zone: $100 to $108. Add on weakness toward $96. Target: $118 to $125 over 9 to 15 months. Confidence: high.
Action Recap
Looking to buy? Start a position in the $100 to $108 range before the deal closes and the full quarterly results land. The yield pays you while the overhang lifts.
Already own it? Hold and collect the dividend. In the full report, watch organic sales and any update on China, and listen for integration milestones as the Kenvue closing gets closer.
Main risk to respect: The extra debt from Kenvue leaves little room for error. If the savings slip, dividend raises get smaller and the rerating takes longer.
That's our coverage for today; thanks for reading! Reply to this email with feedback or any value stocks you want me to check out.
Best Regards,
—Noah Zelvis
Undervalued Edge
