CASE 1–8 Kimberly-Clark is a household products company that produces and sells various paper products under popular brand names such as Kleenex and Scott. In many respects, Kimberly-Clark is similar to Colgate: both are mature and profitable consumer products’ companies that are of similar size. Therefore, Kimberly-Clark is a good company to compare Colgate’s financial performance with. Refer to select financial information about Colgate over the 1996–2006 period reproduced in Exhibit 1.3. The table below provides identical information relating to Kimberly-Clark over the same period.

KIMBERLY-CLARK SUMMARY FINANCIAL DATA

(In billions, except per share data) 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 Net sales 16.75 15.90 15.08 14.35 13.57 14.52 13.98 13.01 12.30 12.55 13.15 Gross profit 6.36 6.12 5.91 5.66 5.55 6.71 6.38 6.00 5.25 5.30 5.47 Operating income (after tax) 1.65 1.70 1.91 1.81 1.80 1.75 1.96 1.82 1.24 1.02 1.53 Net income 1.50 1.57 1.80 1.69 1.67 1.61 1.80 1.67 1.10 0.90 1.40 Restructuring charge (after tax) 0.35 0.17 Net income before restructuring 1.84 1.74 1.80 1.69 1.67 1.61 1.80 1.67 1.10 0.90 1.40 Operating income before restructuring 2.00 1.86 1.91 1.81 1.80 1.75 1.96 1.82 1.24 1.02 1.53 Total assets 17.07 16.30 17.02 16.78 15.59 15.01 14.48 12.82 11.69 11.27 11.85 Total liabilities 10.97 10.75 10.39 10.01 9.94 9.36 8.71 7.72 7.66 7.14 7.36 Long-term debt 2.28 2.59 2.30 2.73 2.84 2.42 2.00 1.93 2.07 1.80 1.74 Shareholders’ equity 6.10 5.56 6.63 6.77 5.65 5.65 5.77 5.09 4.03 4.13 4.48 Treasury stock at cost 1.39 6.38 5.05 3.82 3.35 2.75 1.97 1.42 1.45 0.62 0.21 Basic earnings per share 3.27 3.30 3.64 3.34 3.24 3.04 3.34 3.11 2.00 1.62 2.49 Cash dividends per share 1.97 1.85 1.64 1.37 1.21 1.14 1.09 1.03 1.02 0.96 0.92 Closing stock price 67.95 59.65 65.81 59.09 47.47 59.80 70.69 65.44 54.50 49.31 47.63 Shares outstanding (billions) 0.46 0.46 0.48 0.50 0.51 0.52 0.53 0.54 0.54 0.56 0.56 Required:

Conduct a detailed comparative analysis of Colgate and Kimberly-Clark’s financial performance over the 1997–2006 period.

Specifically:

a. Conduct an index-number trend analysis separately for every item reported in the table (e.g., net sales, gross profit, etc.). Use 1996 as the base year (i.e., set 1996 numbers equal to 100).

b. Calculate the following ratios for every year for each company: return on investment (return on assets, return on common equity), operating performance (gross profit margin, operating profit margin), asset utilization (total asset turnover), capital structure (total debt to equity, long-term debt to equity), dividend payout rate, and market measures (price-to-earnings, price-to-book).

c. Conduct an index-number trend analysis separately for every one of the ratios that you computed in (b). Once again use 1996 as the base year.

d. For analysis in (a), (b), and

(c) that involves net income or operating income, it is important to also examine these numbers after removing the costs relating to restructuring activities. The table calculates net income and operating income after adding the pretax cost of restructuring (e.g., net income before restructuring). Similarly determine net income and operating income before restructuring for Colgate using the data in Exhibit 1.3. Then compute all trends and ratios using these adjusted income numbers in addition to those using the reported numbers.

e. Finally, we need to determine the stock price performance of the two companies over this period. To do that, we need to determine cum-dividend return. Cum-dividend return is the return on a stock including cash dividends.
Colgate’s cum-dividend return over this period is 12.5% compared to 5.9% for Kimberly-Clark. For advanced analysis that uses finance techniques, verify these numbers. Those who don’t want to do this advanced analysis can merely use the cum-dividend returns’ numbers provided above. (Hint: This is advanced analysis that covers material from finance outside the scope of this chapter and should be attempted only by those who are conversant with finance techniques. Cum-dividend return is determined by the following formula: Cum-dividend return for a year  [(Closing stock price  Dividend paid during the year)/Opening stock price] 1. For example, Kimberly-Clark’s cum-dividend return in 1997 is [(49.31  0.96)/47.63] 1  5.5%. Using this formula, determine the cum-dividend return for each company for every year. Then determine the compounded per-year return over the entire period).

f. Examine all of the previous analyses and provide a commentary that compares the performance of Colgate and Kimberly-Clark over the 1997–2006 period.