Description

I recommend KMB stock as an alternative to bonds or cash because it is a well-run, profitable company with potential for near term price appreciation based on the weak relationship I have outlined below.  

Using “CPI Household Paper Products” as a proxy for toilet paper, we can verify what we all know:  Toilet paper keeps going up in price.   This particular CPI subset shows 2.5% annual inflation over the last 24 years.  Going forward, I think toilet paper has as much if not more pricing power than anything else on the store shelf.  Consumers are not going to quit using toilet paper anytime soon.

Really, as you can see from this chart there have been 3 distinctive toilet paper price grabs in the last 24 years. (1) after dotcom bubble (2) after the housing bubble, and (3) just now after the pandemic.

Chart 1:  CPI Household Paper Products 

When the government prints more money, the price of toilet paper goes up.  We can see that relationship over the last 5 years the price of toilet paper has tracked money supply tightly.  Indeed, some think government money paper and bathroom toilet paper will eventually converge as they have overlapping usage but I don’t believe that will happen for a while.  So, let’s stick to the last few years to observe this important relationship between the price of toilet paper and money supply.

Chart 2:  Government Money Paper (US Dollars m2) and Bathroom Toilet Paper (CPI household paper products)

KMB makes toilet paper. It is a decent business to own for many reasons (outlined later in this writeup) but it is particularly attractive in the near term based on what appears to be a divergence of the loose relationship between toilet paper prices and KMB share prices.

Chart 3:  Toilet paper vs. KMB paper

Chart 4:  Toilet paper, KMB paper and money paper

KMB paper is becoming more scarce.  All the different papers have advantages and disadvantages:  The government’s money paper is paying you nothing to hold it but is useful to buy stuff.  There’s too much government money paper going around so I wouldn’t collect it.  Toilet paper is bulky and has high storage costs.  A little toilet paper is all you need. The least worst paper to be holding in size for the long term is KMB paper.   KMB paper is becoming more scarce.  There were over 500 million pieces of KMB paper 20 years ago.  Now there are only 340 million pieces:

Chart 4:  Shares outstanding of KMB stock (KMB paper).  

KMB paper pays you more and more government money paper each month.  Over the last 30 years they’ve grown their dividend 7.5% year.  20 years ago you got $1/year in money paper.  Now you’ll get almost $4/year.

Chart 5:  Dividends from KMB Paper, payable in government money paper.

VALUATION:

Absolute:

Using the dividend discount model, at $135/share we can see that Mr. Market is pricing in a 3.7% dividend growth rate at a 7.1% discount rate.  The actual dividend growth rate of the last 30 years has been 7.5%. 

Table 1:  Intrinsic value of KMB

Relative:

According to Bloomberg there are 16 sell side analysts covering KMB.  The 7th ranked analyst, from Barclays, says KMB is trading at a 28% discount to consumer staple peers.  28% or not, it is pretty easy to see that KMB trades at a slight discount to peers:

Table 2:  Relative valuation of KMB to consumer staples peers:

EXPECTATIONS:

Management’s most recent presentation outlines their investments.  They have popular brands, a convincing plan to further improve efficiency and a decent track record.  I recommend you read that for more color on this investment. They appear to be focusing on the right things.  You’re not paying too much for this thing of beauty:

Catalyst

Near term convergence of toilet paper, money paper and kmb paper.