Published by Bob Ciura on November 4th, 2017
Consumer goods stocks are some of the most reliable dividend payers in the stock market. The Dividend Aristocrats are a group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
Each year, we review all 51 Dividend Aristocrats. The next stock in the series is consumer products manufacturer The Clorox Company (CLX).
Investors have really “cleaned up” with Clorox over the years. The company has raised its dividend for 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. The company had sales of $6.0 billion. It sells its products in more than 100 markets.
Source: Investor Fact Sheet, page 2
The product lineup spans multiple categories, including cleaning and household products, food, personal care, and cat litter.
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.
The strength of Clorox’s business model lies in its industry-leading brands. Consider the market share held by the following brands:
Source: Investor Fact Sheet, page 2
Many of Clorox brands hold the #1 or #2 market share in their respective product categories. This results in pricing power, and high profit margins.
In fiscal 2017, net sales increased 3.7%, while diluted earnings-per-share rose 8.3%.
The company also performed well in the fiscal 2018 first quarter. Net sales rose 4%, along with 7% growth in earnings from continuing operations.
Sales growth benefited from a combination of volume growth and higher pricing in the international markets.
Clorox reported sales increases across all of its operating segments last quarter, led by 5% growth in cleaning and household products.
Growth Prospects
Going forward, Clorox is counting on innovation in cleaning products, cat litter, and water filters, to fuel continued growth.
Source: 2017 Global Consumer Conference, page 9
An example of this is Clorox’s connected Brita water filters. These are Wifi-enabled water filters that automatically re-orders new filters when necessary.
This would allow Clorox to participate in new technological advancements, such as the Internet of Things.
Another growth catalyst for Clorox is e-commerce. As consumers shift more of their spending online, product manufacturers like Clorox are investing in their own e-commerce businesses, to keep up.
E-commerce sales have grown at a 37% compound annual rate over the past three fiscal years.
Source: First Quarter Earnings Presentation, page 38
The rise of Internet retail giant Amazon (AMZN) shows no signs of slowing down, which could be a long-term tailwind for Clorox as well. E-commerce still represents just 4% of Clorox’s total company sales, which means there is plenty of growth potential left.
Clorox forecasts 1%-3% sales growth in fiscal 2018. Earnings-per-share are expected in a range of $5.47 to $5.67, which would represent 3% to 7% growth for the year.
Clorox’s long-term growth financial objectives are as follows:
- Net sales growth of 3% to 5%
- Margin expansion of 0.25% to 0.50%
- Free cash flow of 10% to 12% of net sales
The combination of sales growth, margin expansion, and share repurchases should fuel high-single digit earnings growth moving forward.
Competitive Advantages & Recession Performance
Clorox has multiple competitive advantages. First, it holds a strong brand portfolio. As previously mentioned, Clorox products enjoy high market share.
Over 80% of its brands hold either the #1 or #2 position in their respective categories.
Clorox retains its high industry position, through advertising. Product marketing is a necessity for consumer products manufacturers.
Clorox’s advertising expense is as follows:
- 2015 advertising expense of $523 million
- 2016 advertising expense of $587 million
- 2017 advertising expense of $599 million
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 65% 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.
Clorox’s earnings-per-share through the Great Recession are shown below:
- 2007 earnings-per-share of $3.23
- 2008 earnings-per-share of $3.24 (0.3% increase)
- 2009 earnings-per-share of $3.81 (18% increase)
- 2010 earnings-per-share of $4.24 (11% increase)
As you can see, Clorox increased earnings-per-share each year throughout the recession, including double-digit earnings growth in 2009 and 2010. This demonstrates the company has a recession-resistant business model.
Valuation & Expected Returns
Meanwhile, Clorox trades for a price-to-earnings ratio of 23.5. This is slightly below the 25.8 average price-to-earnings ratio of the S&P 500 Index.
However, Clorox appears to be overvalued, based on its own historical valuation multiples. According to ValueLine, Clorox stock has held an average price-to-earnings ratio of 20.6 in the past 10 years.
Source: Value Line
As a result, Clorox is currently valued 14% above its 10-year average. Clorox is not extremely overvalued, but the current price does not seem to be a bargain. Clorox stock could perhaps be described as fairly valued.
The takeaway is that investors cannot be assured that Clorox’s valuation multiple will continue to expand beyond the current level of 23.5.
Instead, future returns will be derived from earnings growth and dividends. A potential breakdown of future returns is as follows:
- 3%-5% revenue growth
- 0.25%-0.5% margin expansion
- 1% share repurchases
- 2.6% dividend yield
Sales growth and margin expansion figures follow management guidance, which seems to be a reasonable estimate. Over the past 10 years, Clorox increased earnings-per-share by approximately 5% per year.
In addition to share buybacks and dividends, total returns could reach roughly 7%-9% per year.
Final Thoughts
Clorox is a reliable dividend stock. The company has a leadership position across its product markets, with potential for growth. Right now does not appear to be a good buying opportunity, as Clorox stock trades significantly above its 10-year average.
That said, the company should be able to continue its four-decade long streak of annual dividend raises regardless of the overall economic climate.
