Trouble at P&G and Kimberly-Clark: It’s Either a Baby Shortage or a Diaper Glut

We’re as fascinated by doomsday demographics and the next educated worrywart, but we’d been thinking the true dangers of falling birthrates were the bankrupting of Social Security and Medicare, and the ugly transition from a technology economy to a nursing home economy.

Turns out there are even bigger worries: diaper sales aren’t so hot, due to a shortage of baby bottoms, and long-time stock market stalwarts Procter & Gamble (PG) and Kimberly-Clark (KMB) are suffering as a result of their reliance, respectively, on Pampers and Huggies.

The U.S. birth rate – yearly births per 1,000 women -- fell to 13.0 in 2010 from 14.4 in 2000. If that trend accelerates, two sweet dividend yields could be in danger.

So, if you care anything about value investing, and you’re of child-bearing age, you’ll drag your spouse into the bedroom and get busy. The U.S. birthrate is still higher than many Western democracies. Perhaps that’s due to a higher devotion to religion in the U.S., or our national optimism, or the shoddy condition of sex education in out schools. Whatever, it’s good news.

The Italians, Japanese and Ukrainians have all but forgotten how to procreate, it seems, with birthday rates of 9.06, 8.39 and 9.59, respectively. Those countries are headed toward being giant old folks homes, though the Ukrainians have a shorter life expectancy.

Kimberly-Clark’s personal care unit, which includes the diaper business and represented 45% of the company’s $20.85 billion in total revenue in 2011, suffered a 13.5% drop in operating profit last year to $1.53 billion, hurt by a decline in U.S. diaper sales.

This unit represents more than 50% of the company’s operating profit and has the highest profit margin of Kimberly-Clark’s four major business segments. So ongoing hits here could hurt its revenue growth and keep downward pressure on profits.

KMB Revenues TTM Chart

KMB Revenues TTM data by YCharts

The company is hopeful the improving economy will help, er, goose the birthrate back up and reverse the slide in sales of Huggies. However, it expects the diaper sector to contract about 2% this year after a similar slide in 2011.

This decline was seen in the first quarter, which ended March 31. Kimberly-Clark said sales in this key business unit rose 8%, but operating profit gained 2.6%, with volumes of diapers down mid to high single-digit percentages.

Rival Procter & Gamble is similarly seeing operating profit at its baby care and family care unit, which includes P&G’s biggest brand, Pampers, under pressure. In its fiscal second quarter, which ended Dec. 31, its baby and family care unit enjoyed a 6% gain in revenue but only a 3% rise in the segment’s operating profit.

In fiscal 2011, which ended June 30, 2011, sales in this unit gained 6% to $15.61 billion but operating profit slipped 3% to about $2 billion. At P&G, the diaper segment is only 19% of sales and 17% of earnings.

Nevertheless, Kimberly-Clark’s stock has had the upper hand over the past year.

KMB Chart

KMB data by YCharts

Despite the outperformance, Kimberly-Clark’s PE remains lower than P&G’s PE.

KMB PE Ratio Chart

KMB PE Ratio data by YCharts

Both companies have a solid track record of paying dividends: 121 consecutive years for P&G, and since 1935 at Kimberly-Clark. P&G has raised its dividend every year for the past 55 years; 39 straight years of increases for Kimberly-Clark. And both have a compelling dividend yield.

KMB Dividend Yield Chart

KMB Dividend Yield data by YCharts

Michael McHugh is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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