This Stock Has Raised its Dividend for 37 Consecutive Years

When I think of a business I want to invest in for the next decade or two, I imagine a business that produces products and/or services that people all around the world want and/or need every single day. These products and/or services need to be ubiquitous.

And what could be more ubiquitous than household cleaning supplies, like bleach?

Think of bleach. You know, the chemical product that you use to whiten your laundry or disinfect your counter.

Now think of Clorox bleach. The two are almost synonymous, correct?

That’s because The Clorox Co. (CLX) is a great company at driving the desire for its products; products that people effectively can’t go without. You have to clean your house, and Clorox produces the products that get the job done.

For over 100 years, this company has been providing the kinds of products that households across the globe need, and I see no reason this won’t continue for another century.

And I put my money where my mouth is: I’m a shareholder in this business, as you can see in my personal portfolio.

The Clorox Co. (CLX) manufactures and markets consumer products, including household cleaning products, food products, and personal care products.

They operate in four segments: Cleaning (32% of fiscal year 2013 sales); Household (30%); International (22%); Lifestyle (16%). 78% of FY 2013 sales came from the US.

Liquid bleach represented about 14% of sales, trash bags 13%, and charcoal 10%.

Clorox is just a really interesting company. 90% of their portfolio of brands holds a #1 or #2 market share, which just speaks to the strength of their brands. We’re talking brands like Clorox, Burt’s Bees, Brita, Tilex, 409, Glad, Hidden Valley, Kingsford, Fresh Step, and Liquid Plumr, among others. What investors may not realize is that this is a company with a market cap of just $11.85 billion, so there’s really a lot of room for the company to grow.

Speaking of growth, let’s see how the company fared over the last 10 years.

Revenue is up from $4.324 billion in 2004 to $5.623 billion in 2013. That’s a compound annual growth rate of 2.96%, which isn’t overly impressive. However, the company did sell off its auto care business in 2010, which included brands like STP and Armor All. This sale did impact revenue negatively during this period.

Earnings per share grew from $2.55 to $4.31 during this same time frame, which is a CAGR of 6%. This is pretty respectable, although the company has cited numerous challenges regarding currency exchange rates. Specifically, recent currency devaluation in Venezuela has been impacting reported EPS. However, S&P Capital IQ still predicts EPS to grow at a 7% compounded annual rate for the next three years.

Dividend growth is a real bright spot for Clorox, and about as clean as their bleach.

The company sports a 37-year record of raising its quarterly per share dividend, with a 10-year dividend growth rate of 10.7%. That means Clorox is a “Dividend Champion”, and is featured as such on David Fish’s Dividend Champions, Contenders, and Challengers document, which lists 543 stocks with at least five consecutive years of dividend raises. So with inflation running a little north of 2% right now, investors in Clorox are seeing their purchasing power increase with every dividend raise, which is fantastic.

The dividend payout ratio is a bit high at 68.2%, which portends future dividend growth more in line with earnings growth.

The current yield, however, is really quite attractive in this market at 3.21%.

If the company can grow dividends at between 6-7% over the long run, that should provide shareholders with ~10% total returns after factoring in the current yield, assuming a static valuation.

Clorox’s balance sheet is probably my least favorite aspect of the business. The long-term debt/equity ratio is 14.9, which is not attractive at all. And that’s because the company has very little common equity. They currently sport about $1.1 billion in goodwill, which means the book value is quite low.

However, the interest coverage ratio, at 8, is pretty solid. That means the company earns enough before interest and taxes to cover interest expenses eight times over, so they’re in no danger of not being able to cover the current interest charges on their debt load.

Clorox operates with a “2020 Strategy”, which is a set of long-term financial goals. Specifically, the company wants to grow net sales 3-5 percent annually, expand earnings before interest and taxes (EBIT) margin 25-50 basis points annually, and generate free cash flow of 10 to 12 percent of sales annually.

The profitability of Clorox looks pretty solid. Net margin has averaged 9.27% over the last five years, which is pretty good. But this can probably be improved, as outlined above.

I think Clorox has a lot of opportunity ahead. 22% of their net sales come from international markets, of which 2/3 is in developing markets. This leaves plenty of growth on the table as Clorox grows its channels and product offerings abroad, and as these markets continue to develop. In addition, the company is much, much smaller than many of its rivals. With a market cap of just under $12 billion, they’re big enough to take advantage of economies of scale and global distribution networks, but also small and nimble enough to make rapid changes which could better the business.

And the market share most of their brands command is especially impressive, as products like Clorox bleach, Brita, Kingsford/Match Light, Hidden Valley salad dressings, Pine-Sol, and Clorox disinfecting wipes all possess a #1 share in their respective markets, with some of these products sporting a market share above 60%.

I think Clorox should be able to drive great shareholder returns over the next decade or so. They have immense opportunities in emerging markets, strong brands, and take shareholder return seriously. In addition to the impressive dividend record, they’ve repurchased 40% of outstanding shares over the last 10 years.

However, risks remain. Notably, many of the products that Clorox manufactures are under intense competitive pressure, especially from private label brands. In addition, the company has faced a lot of headwinds resulting from currency exchange rates, and this pressure may continue for the foreseeable future.

Shares in Clorox trade hands for a price-to-earnings ratio of 21.21, which is a bit rich compared to the five-year average ratio on shares of 19.1. Most stocks are a bit pricey right now as the broader market has relentlessly marched upward, and consumer stocks have been particularly popular as they serve to be defensive holdings for many investors because the products they produce aren’t necessarily affected by changes in the economy.

I valued shares myself using a dividend discount model analysis with a 10% discount rate (my desired rate of return) and a 6.5% long-term growth rate. I chose this growth rate as it’s between Clorox’s posted growth rate in earnings per share over the last decade and the predicted growth rate over the foreseeable future. This rate is also well below the company’s 10-year growth rate in dividends. This input gives me a fair value of $90.07, which is comparable to the $92.12 shares are trading at right now. I think it’s safe to say that Clorox is pretty fairly valued today, which isn’t too bad considering where the broader market is at.

Bottom line: The Clorox Co. (CLX) is a solid investment, with great brands, exposure to emerging markets, and a plan for growth. As long as people continue to need products to clean their homes, bag their trash, and filter their water, this company should do well.

— Jason Fieber