The Best "Forever" Stock to Own for a Correction

Tim Begany's picture

Monday, March 26, 2012 - 11:30am

by Tim Begany

Despite widespread pessimism and a whole lot of volatility, the Dow Jones Industrial Average and S&P 500 have both gained roughly 25% a year for the past three years. I think the bull market could continue for quite some time, maybe another three or four years, or even longer.

But in the short-term, there are likely to plenty of obstacles, trials and tribulations.

I hope I'm wrong about this, but I suspect the market may pull back significantly, or even correct, in the near future. We could be at high risk for a correction now because of things like slowing growth in China, rising fuel prices and escalating tensions with Iran. If nothing else, the market may have simply gotten ahead of itself and may need a brief reprieve before resuming its climb.

While corrections might not faze a small number of investors with a high risk tolerance, these periodic selloffs cause most investors a lot of anxiety. In these cases, seeing their investment values drop so quickly can trigger an overwhelming urge to sell at the bottom and then stay in cash long after the market has recovered and left them in the dust.

A great way to avoid this is to own defensive stocks.

These stocks are usually far less volatile than the overall market because they're in very stable businesses, and they generally pay very good dividends. So when the market is down 10%, a top-notch defensive stock may only be off only 2% to 4%. When the financial markets are frantic and it seems everyone is rushing for the exits, this might be the difference between selling in a panic and sitting tight until the storm passes. And when the market gets back on track, because you held, you're usually more likely to capture more upside than many "riskier" stocks, because you won't have to time your entry point.

In my opinion, there's no better defensive stock than Kimberly-Clark Corp. (NYSE: KMB).

As you may know, Kimberly-Clark is a leader in the global health and hygiene space, selling essential items like bathroom tissue, diapers, feminine products and paper towels through supermarkets, mass merchandisers and pharmacies. Its brands include Kleenex, Scott, Huggies, Pull-Ups and Kotex.

Importantly, shares of the Dallas-based company have been far less volatile than the broader market -- and they're usually more than 80% less volatile over time, as the stock's beta of 0.19 indicates. (Beta compares a stock's price movement to that of the overall market. A value of 1.0 means the stock moves in line with the market.) To put it another way, if the market dropped 10%, then the stock might only fall about 2%.

And while it's only mildly comforting to know that you'd lose less than the broader market if it dropped, consider this: The per-share dividend of $2.76 is good for a yield of 4%. And it's remarkably consistent. In fact, the payout has risen ever single year going back to 1972. So you're essentially getting paid to hold this stock through good times and bad. In fact, as StreetAuthority Co-Founder Paul Tracy (who is also the man behind our Top-10 Stocks advisory) likes to say, this is a stock you can truly hold "forever."

Long-term financial performance has been dependable. During the past 10 years, for example, revenue grew 4.4% a year, from $13.6 billion to $20.9 billion. Analysts project a solid 5% growth rate during the next three to five years, which would bring revenue to $26.7 billion a year by the end of 2016. Earnings per share (EPS) grew by 3.1% a year during the past 10 years, climbing from $3.22 to $4.35. EPS are projected to expand at a markedly faster 7% for the next three to five years, reaching $6.10 in 2016, mainly because of cost-cutting initiatives like streamlining manufacturing processes and working more efficiently with raw material suppliers.

The cost-cutting program saved $875 million during the past three years and is expected to save another $150 million to $200 million in 2012. Kimberly-Clark is also exiting the pulp-making business, having closed its last pulp mill in Everett, Washington in February following several years of mill closings globally. In management's view, it's now cheaper to buy the pulp needed to make tissue products than it is to self-supply by owning pulp mills. The move will increase operating profits by at least $75 million in 2013 and by at least $100 million in 2014, analysts predict.

Risks to Consider: Since wood pulp is a key component in so many of Kimberly-Clark's products, rising pulp prices could hinder profits and make it difficult to hike dividends. This doesn't appear to be an issue, at least for now. The price is actually down quite a bit, falling 14% during the past 12 months, from just below $1,000 per ton to around $860 a ton.

Action to Take --> With the cost of wood pulp under control, and because Kimberly-Clark is so cost-conscious in general, I think the company is in an excellent position to keep delivering the safe, reliable performance shareholders have come to expect. If you're interested in the stock, I'd go ahead and buy it now. While I wouldn't describe it as cheap, the price-to-earnings (P/E) ratio of 18 looks reasonable compared with the industry average of 19.

Besides, who knows when the next correction might hit? It could be next week or next year. Either way, you'd be prepared by holding one of the safest stocks on the market.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.