Whenever I think of long-term investments that I can sleep well at night owning I always come back to companies that own strong brands in consumer products.
And brands become strong by providing products that are both high in quality and ubiquitous.
People require certain things in life. Think laundry detergent. Think oral care. Think deodorant.
[ad#Google Adsense 336×280-IA]Consumers regularly use these products and deplete them, requiring them to buy more.
And generally speaking, if your toothpaste and deodorant is getting the job done – you don’t want yellow teeth, and you don’t want to smell – you’re going to keep buying the same brands over and over again.
This repetitive nature creates very stable revenue and cash flow for companies that manufacture these products.
Furthermore, due to the nature of these products, they’re about as recession-proof as it gets. The economy could tank tomorrow, but people aren’t going to stop brushing their teeth or washing their clothes. So the profit keeps coming, and with that profit comes dividends!
And that’s where a company like Church & Dwight Co., Inc. (CHD) comes into view.
This is a company that has the #1 condom brand in Trojan; the #1 laundry additive brand in OxiClean; the #1 battery powered toothbrush in Spinbrush; the #1 branded pregnancy kit in First Response; the #1 depilatory brand in Nair; the #1 oral care pain relief brand in Orajel; the #1 extreme value laundry detergent brand in Xtra; and the #1 gummy brands for adult and children in Vitafusion and L’il Critters. Furthermore, their big brand in Arm & Hammer is in more aisles in grocery stores than any other brand; A&H branded products are in 86% of US households.
You don’t get to be the #1 product in multiple categories if you’re not providing something that is high in quality, and something that the market wants. CHD hits both of these points very well, which is why they’re as successful as they are.
Church & Dwight Co., Inc. (CHD) develops, manufactures, and markets a wide array of branded household, personal care, and specialty products.
They operate in three segments: Consumer Domestic (75.6% of fiscal year 2013 sales); Consumer International (16.7%); and Specialty Products (7.8%).
Church & Dwight is widely diversified across a number of products in the consumer space, which is wonderful to see. And they have grown their international sales significantly over the last 13 years, going from essentially 0% to almost 17% in that time frame. I would expect for international sales to continue fueling some of the company’s growth moving forward. They currently export products to 90 countries around the world.
They have had fantastic growth over the last decade. And the entire company is worth less than $10 billion (market cap of $9.26 billion), so I can see plenty of growth still yet ahead for this company. Their fiscal year ends December 31.
Revenue has grown from $1.462 billion in fiscal year 2004 to $3.194 billion in FY 2013. That’s a compound annual growth rate of 9.07%. Very impressive rate, which has coincided with their substantial growth in international markets.
Earnings per share increased from $0.68 to $2.79 during this same time period, which is a CAGR of 16.98%. That’s the kind of stuff that makes an investor smile to be sure, but I have a hard time imagining that they can keep that up for another decade. However, the predicted growth rate from S&P Capital IQ is still impressive – they predict EPS to grow at a compound annual rate of 10% over the next three years.
As a dividend growth investor, one of the first things I look at when considering an investment is the dividend policy. Is the company in question paying a dividend? Is the dividend growing above the rate of inflation, keeping my purchasing power safe? Is it safe? Is the yield attractive?
Well, yes, yes, yes, and yes!
CHD definitely pays a dividend. And they’ve been increasing it for the last 18 consecutive years, which shows their commitment to paying shareholders increasing cash on the back of increasing profits.
That means CHD is featured as a “Contender” on David Fish’s Dividend Champions, Contenders, and Challengers list, which tracks and documents 553 stocks that have increased their dividends for at least the last five consecutive years.
And they haven’t just increased the dividend. They’ve given shareholders very generous raises; the stock currently sports a 10-year dividend growth rate of 26.9%. That means the dividend has increased at an annual rate of almost 27% over the last decade. Take that, inflation!
Meanwhile, the dividend is very safe.
The payout ratio currently stands at just 44.4%, which means the company pays out 44.4 cents of profit to shareholders in the form of a dividend, and keeps the other 55.6 cents to continue growing the dividend.
That’s a very attractive mix, and I generally look for companies with a 50% payout ratio or less to ensure continued dividend raises.
The yield, at 1.79%, probably leaves a bit to be desired. That’s pretty close to the broader market’s average, but I generally prefer a yield above 2.5% to ensure enough income to one day live off of. However, those that don’t need a lot of income now probably won’t mind this somewhat low yield. Especially considering the generous dividend raises, as that means Church & Dwight’s stock could provide fairly significant income after just a few years of continued robust dividend growth.
One other aspect of a great business is an attractive balance sheet, where debt is managed appropriately. And CHD doesn’t fail to impress here.
The long-term debt/equity ratio stood at 0.28 at the end of FY 2013, which is quite low. The interest coverage ratio is 22.6, which means that earnings before interest and taxes can cover interest expenses more than 22 times over. This means CHD is extremely financially flexible and has very little debt.
Profitability is solid and attractive. The company averaged net margin of 11.14% over the last five years. Return on equity, meanwhile, averaged 16.63% over this same time frame.
CHD’s stock paints a wonderful picture. You have substantial top line and bottom line growth, great profitability, low debt, and a dividend that is healthy and being raised generously year after year. There is an awfully lot to like here.
The company sports healthy market share across a number of brands and products, which is very attractive, in my view. Who wouldn’t want to invest in a company that sports such strong brands? The great thing is that with so many successful products and brands, the company should be able to do quite well even if one product or brand suffers. If competition becomes extremely heated in laundry detergent, for example, and Xtra slips a bit, the company has Orajel, Trojan, and Nair to keep it rolling.
And they have a number of other brands that weren’t touched upon earlier. Examples include: Delicare, Orange Glo, Aim, Pepsodent, Close-Up, Arrid, and Kaboom.
Furthermore, I believe the company will continue to aggressively expand its international presence, which should fuel future growth across its brands and product portfolio. And Church & Dwight aims to expand gross margin by focusing on product improvement and launching products that have higher margins. New product development and accretive acquisitions could also fuel future growth.
However, the business does face risks. Overall, I view CHD as a low-risk stock, but one does have to consider that the branded consumer product space is fiercely competitive. Church & Dwight is a smaller player, so they have to fight hard to keep larger rivals at bay.
I’m unfortunately not a shareholder in this company, but I do own pieces of 49 other wonderful businesses. And not owning CHD is perhaps to my detriment, as both the stock and company have performed gloriously over the last ten years. But I always felt that the stock was slightly pricey, so let’s see if that’s still the case today.
CHD is trading hands at a price-to-earnings ratio of 24.75, which is significantly over both the broader market and the stock’s own five-year average of 20.7. They say you get what you pay for, and in this case you have a premium stock that might just be trading for a premium price.
I went ahead and valued the stock independently using a dividend discount model analysis with a 10% discount rate and a 8% long-term growth rate. That growth rate would appear to be conservative considering the stock’s 10-year growth rate in both earnings and the dividend, but EPS growth is expected to slow substantially over the foreseeable future. The DDM analysis gives me a fair value of $66.96, which isn’t far from where the stock trades at right now. This could be your opportunity to own a great stock at a roughly fair price.
Bottom line: Church & Dwight Co., Inc. (CHD) is a market leader across numerous recession-proof products, backed by strong brands. Toothpaste, deodorant, vitamins, laundry detergent, and pregnancy kits are the type of products that people buy no matter what’s going on in the economy, and as such I think the company continues to grow at attractive rates from here. If you’re looking for a well-run company with strong brands and a history of raising dividends, you might need to look no further than this stock right here.
–Jason Fieber, Dividend Mantra
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