It has been seven years since the last recession. This is longer than the average time between recessions, so it could be argued the U.S. economy is overdue for a downturn.

If the U.S. economy does enter a recession, the stocks that will outperform typically come from stable industries like consumer staples.

Kimberly-Clark (KMB) is one of those companies. It has a defensive business model and pays a rock-solid dividend.

Kimberly-Clark has paid uninterrupted dividends to shareholders for more than 80 years. And, it has increased its dividend payout for the past 44 consecutive years.

Kimberly-Clark is a Dividend Aristocrat. These are companies in the S&P 500 Index with at least 25+ years of consecutive dividend increases each year.

You can see the entire list of 50 Dividend Aristocrats here.

Kimberly-Clark typically announces its yearly dividend increase shortly after its fourth-quarter earnings results, which are scheduled for late January.

This article will discuss why Kimberly-Clark is about to continue its annual streak of dividend growth, with a dividend increase coming in the next few weeks.

Business Overview

Kimberly-Clark is a global consumer products giant. It has three core operating segments, which are as follows:

• Personal Care (50% of sales)
• Consumer Tissue (33% of sales)
• K-C Professional (17% of sales)

Kimberly-Clark’s Personal Care segment includes brands like Huggies, Pull-Ups, Kotex, Depend, and Poise.

The Consumer Tissue segment includes Kleenex, Scott, Cottonelle, and Viva, while the K-C Professional segment sells the company’s core products to workplaces.

Kimberly-Clark operates under an initiative called Global Business Plan, or GBP.

Source: Barclays Global Consumer Staples Conference, page 5

The GBP also includes a set of financial performance objectives, which are:

• Annual Organic Sales Growth: 3%-5%
• Annual Earnings-per-Share Growth: Mid-to-high single digits
• Return on Invested Capital: 20 basis point-40 basis point expansion
• Dividend Growth: In-line with earnings-per-share growth

The company has exceeded its objectives over the past decade.

From 2004-2015, Kimberly-Clark generated 4% organic sales growth, 6% earnings-per-share growth, 75 basis-point improvement in ROIC, and 8% dividend growth each year.

More recently, a few challenges have emerged for Kimberly-Clark. One is slowing economic growth in the emerging markets like China and Russia.

For example, organic sales in diapers rose in the low single-digits in China last quarter, as strong volume growth was offset by weaker pricing.

Another challenge is the strong U.S. dollar, which is negatively impacting the company’s international sales.

These challenges have made for a tough environment outside the U.S. This disproportionately hurts Kimberly-Clark because the company has accelerated its exposure to international markets over the past few years.

This has weighed on the company throughout the past year. For example, sales declined in the most recent quarter, driven by a strong U.S. dollar.

Source: Third Quarter Earnings presentation, page 5

Total net sales declined 2.8% over the first nine months of 2016. Despite these pressures, Kimberly-Clark has a plan to keep earnings steady.

Growth Prospects

When a company encounters stiff headwinds like Kimberly-Clark has over the past year, it’s reasonable to question its ability to raise its dividend.

The good news is that Kimberly-Clark is not an average company. Thanks to its strong brands and global scale, the company can effectively squeeze out excess costs.

Kimberly-Clark is in the middle of a cost-cutting program called FORCE, which stands for Focus On Reducing Costs Everywhere. It is a broad, far-reaching initiative designed to reduce expenses across the business.

Source: Barclays Global Consumer Staples Conference, page 20

The company will generate significant cost-savings from FORCE. In addition, lower commodity prices will help the bottom line.

Kimberly-Clark realized $10 million in savings last quarter, due to lower fiber costs. For the full year, the company expects approximately $75 million in lower raw materials costs.

This is helping the company improve margins, even though sales are declining.

Source: Third Quarter Earnings presentation, page 6

Another method the company is using to boost margins is raising prices. Kimberly-Clark has many brands that lead their repsective product categories. This provides pricing power.

In particular, K-C Professional is benefiting from this. Last quarter, segment profit margin expanded by 100 basis points from the same quarter last year, driven largely from higher prices.

In addition to margin expansion, the company’s share repurchases will help grow earnings.

Source: 2016 Barclays Global Consumer Staples Conference, page 25

From 2003-June 2016, Kimberly-Clark reduced its share count by 28%. Fewer shares outstanding helps accelerate earnings-per-share growth.

As the company buys back shares, each remaining share receives a higher amount of earnings. This boosts earnings-per-share growth.

Dividend Analysis

One of the best aspects of Kimberly-Clark stock is its dividend. Kimberly-Clark paid $12.4 billion of dividends over the past 12 years.

The company has a $3.68 per-share annual dividend. In the last 12 months, the company generated $5.50 of earnings-per-share. This works out to a 67% payout ratio.

In other words, Kimberly-Clark currently distributes two-thirds of its earnings-per-share to investors in dividends. This is a healthy payout ratio, and leaves sufficient room for a dividend increase.

And, Kimberly-Clark’s future earnings-per-share growth help justify a dividend increase.

Over the past five years, Kimberly-Clark has raised its dividend by 6.5% each year, on average. This is a good baseline for the 2017 raise. In 2016, Kimberly-Clark increased its dividend by 4.5%.

Given the fundamental challenges that have persisted over the past year, it is reasonable for investors to expect a 4%-6% dividend increase in 2017.

Final Thoughts

Kimberly-Clark has a current dividend yield of 3.1%. By comparison, the S&P 500 Index has an average dividend yield of 2%.

Since Kimberly-Clark already offers an above-average dividend yield, there is not as much incentive to raise the dividend by a high rate. In addition, caution is likely prudent, given the company’s struggles to grow revenue.

That being said, Kimberly-Clark will likely still provide a solid increase, that exceeds inflation by several percentage points. In a low-growth global economy, Kimberly-Clark’s defensive business model pays dividends.

Consumers will always need paper towels, diapers, and tissues. And, in a low interest rate environment, a 3% dividend yield and mid-single digit dividend growth is nothing to sneeze at.The company is ranked as a hold at current prices using The 8 Rules of Dividend Investing.