Dividend Aristocrats In Focus: The Clorox Company

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Dividend Aristocrats In Focus: The Clorox Company


Updated on March 3rd, 2021 by Bob Ciura

Consumer goods stocks are some of the most reliable dividend payers in the stock market. Consumers need staples products for their daily lives, which provides a certain level of demand from year to year. Demand for consumer staples products remains steady, even during recessions, which makes it an appealing industry for investors looking for consistent dividends.

This is why there are several companies from the consumer staples sector on the Dividend Aristocrats list, which includes 65 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.

You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:

 

Each year, we review all Dividend Aristocrats individually. The next stock in the series is consumer products manufacturer The Clorox Company (CLX).

Clorox has one of the longest streaks of dividend increases in the market as the company has raised its dividend for over 40 years in a row.

This article will provide an in-depth review of Clorox’s business model, and future outlook.

Business Overview

Clorox started out over 100 years ago, with the debut of its namesake liquid bleach in 1913. Today, it is a global manufacturer of consumer and professional products than collectively span a wide variety of uses and customers. The company produces annual revenue in excess of $6 billion and it sells its products in more than 100 markets.

The company has a highly diverse set of businesses with myriad brands and products within each, providing Clorox with huge global scale.

Source: Investor Presentation

The company’s largest segment is home care, which is part of the core Cleaning segment. However, Clorox is much more than a cleaner company as it produces food, pet products, charcoal, and a wide variety of other brands.

The Household segment includes the Glad, Kingsford, Fresh Step, and Renew Life brands. Cleaning products include Clorox, Pine-Sol, and the Clorox Commercial Solutions businesses. Lifestyle brands include Hidden Valley, Burt’s Bees, and Brita. Lastly, the International segment sells Clorox’s brands around the world.

Many of Clorox’s brands hold the #1 or #2 market share in their respective product categories. In fact, more than 80% of its total revenue comes from products that fit this description. This results in pricing power, and high profit margins. The company states that two-thirds of its portfolio of brands have stable or growing household penetration, so organic growth should be easier to come by in the coming years.

Clorox reported fiscal second-quarter results on February 4th, 2021 with results coming in better than expectations on both the top and bottom lines. However, the company provided bearish guidance on comparable sales for the back half of the year. For the quarter, Clorox reported sales of $1.84 billion, which was up 27% year-over-year. The company said it produced double-digit sales increases in three of its four segments due to ongoing COVID-19-driven demand, as well as behavioral shifts among consumers that are spending more time at home.

Clorox added 1% to the top line from a recent acquisition of a joint venture in Saudi Arabia, while organic sales were up 26% for the quarter. Investors should note that COVID-driven demand increases will begin to be lapped in the company’s fiscal third quarter, which could make for difficult comparisons.

Gross margin was up 130 bps to 45.4% of revenue year-over-year, representing the ninth consecutive quarter of gross margin expansion from the prior year. The gains this quarter were due to strong volumes, cost saving initiatives, and lower trade promotion spending. Earnings-per-share came to $2.03 in Q2, up 39% from $1.46 in the same period a year ago.

Growth Prospects

Looking ahead, Clorox has some levers it can pull to continue its recent growth. The company is continuously innovating with product extensions on its current lineup, such as flavors and cross-branding. It has done those things for a long time and will continue to do so in order to stay competitive.

It is also focusing its mergers and acquisitions on companies that are growing, focused in the US, and are margin-accretive. Clearly, the company wants to boost domestic growth and margins through acquisitions.

Clorox is taking a prudent approach by buying companies with a better margin profile than its existing portfolio, which boosts revenue and margins simultaneously. This is congruent with the company’s constant focus on driving every basis point of margin from each product, which has served it well during the recent top line weakness.

We forecast just 2% earnings-per-share gains in the next five years. The past couple years were marred by higher commodity and freight costs, which pressured the company’s margins. Fiscal second-quarter results were outstanding on the margin front, but we continue to see too many headwinds to make us overly bullish on Clorox’s earnings-per-share growth.

Competitive Advantages & Recession Performance

Clorox has multiple competitive advantages. First, it holds a tremendously strong brand portfolio. As previously mentioned, Clorox products enjoy very high market share across the portfolio.

Clorox retains its high industry position in part through advertising and it spends very heavily to maintain that position. Product marketing is a necessity for consumer products manufacturers and Clorox spends 10% of its revenue on this each year.

Another advantage of Clorox’s business model is that its products are used by millions of people each day, in good economies and bad. According to the company, Clorox-branded products are in about two-thirds of U.S. households.

There will always be a certain level of demand for household cleaning products and food, even if the economy enters a downturn. This allows the company to remain profitable during recessions. Indeed, Clorox is a strong example of a defensive stock. Its earnings-per-share through the Great Recession are shown below:

As you can see, Clorox increased earnings-per-share each year throughout the recession, including double-digit earnings growth in 2009 and 2010.

Clorox also performed very well in the economic downturn of 2020, as its products saw much higher demand during the pandemic. This demonstrates the company has a very recession-resistant business model and a high level of safety.

Valuation & Expected Returns

Clorox trades for a price-to-earnings ratio of 21.7, which is below our estimate of fair value, which is 23 times earnings. As the stock is trading below fair value, we see it as slightly undervalued. If the P/E ratio expands from 21.7 to 23 over the next five years, it would lift annual returns by 1.2%.

Shareholder returns will be further boosted by future earnings-per-share growth, which we estimate at 2% per year. Finally, Clorox’s 2.5% dividend yield will add to shareholder returns, leading to total expected returns of 5.7% per year over the next five years. This is a decent expected rate of return, but is not high enough to warrant a buy rating at this time.

Final Thoughts

Clorox is a reliable dividend stock. The company has a leadership position across its product markets, with potential for some growth. The company should be able to continue its four-decade long streak of annual dividend raises regardless of the overall economic climate. This makes it a consistent dividend stock for risk-averse income investors. However, the stock remains a hold in our view, and investors interested in total return potential should wait for a further pullback in the share price.

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