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 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 products that households across the globe need, and I see no reason why this won’t continue for another century.
Moreover, they’ve used their household cleaning products as a foundation upon which to build a global diversified consumer products company.
Of course, I’m not just writing about this stock.
I put my money where my mouth is: I’m a shareholder in this business, as you can see by checking out my personal six-figure dividend growth stock portfolio.
Clorox manufactures and markets consumer products, including household cleaning products, food products, and personal care products.
The company has more than 8,100 employees. They operate across more than 25 countries. And they’re in more than 100 markets globally.
They operate in four segments: Cleaning, 34% of fiscal year 2017 sales; Household, 33%; International, 17%; Lifestyle, 16%.
More than 80% of sales came from the US.
Clorox is just a really interesting company. 80% 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 ~$16.5 billion. Even though it’s a global business, it’s a relatively small consumer products giant. So there would appear to be 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 $5.273 billion in fiscal year 2008 to $5.973 billion in FY 2017. That’s a compound annual growth rate of 1.39%.
Not particularly 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.
In addition, the company had to completely abandon operations in Venezuela in 2014 due to economic and political turmoil in the country, which has also negatively affected sales.
Meanwhile, earnings per share grew from $3.24 to $5.33 during this same time frame, which is a CAGR of 5.69%.
This is pretty respectable, with excess bottom-line growth boosted by margin expansion and a slight reduction in the outstanding share count (by way of buybacks).
Looking forward, CFRA predicts that Clorox will compound its EPS at an annual rate of 8% over the next three years.
Dividend growth is a real bright spot for Clorox – about as clean as their bleach.
The company has increased its dividend for 40 consecutive years, with a 10-year dividend growth rate of 8.0%.
That means the stock is a “Dividend Champion”, and it’s featured as such on David Fish’s Dividend Champions, Contenders, and Challengers document, which lists 844 US-listed stocks that have raised dividends each year for at least the last five consecutive years.
With US inflation having been in the low single digits for years now, Clorox shareholders are seeing their purchasing power increase with every dividend raise, which is fantastic.
The dividend payout ratio is currently just 55.4%, which portends future dividend growth at least in line with EPS growth.
We could be looking at dividend growth in the mid single digits, if not higher, over the foreseeable future.
And you’re pairing that dividend growth with the stock’s current yield of 2.92%.
That yield is right in line with the stock’s five-year average yield, which is an initial indication of fair value.
But if the company can grow dividends at between 6-7% over the long run, that could provide shareholders with 9%-10% annualized total returns, assuming a static valuation.
Not a bad result at all for a high-quality, low-risk blue-chip stock like this.
Clorox’s balance sheet has markedly improved in recent years.
Although the long-term debt/equity ratio, at 2.57, might not look great, that’s because of low common equity. This number was in the teens just a few years ago.
The interest coverage ratio, however, is almost 13. This number was in the single digits just a few years ago.
There are no issues whatsoever with Clorox’s ability to cover its ongoing interest expenses.
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.
It looks like the margin part of that strategy is working out nicely, as net margin, at least, has expanded noticeably in recent years.
Net margin has averaged 10.68% over the last five years, which is very strong.
That number came in at almost 12% for FY 2017. And it was under 9% a decade ago. So we can see plenty of improvement here.
I think Clorox has a lot of opportunity ahead.
Almost 20% of their net sales come from international markets, with plenty of these sales occurring in developing markets.
This leaves plenty of growth on the table as Clorox grows its channels and product offerings abroad while 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 $17 billion, they’re big enough to take advantage of economies of scale and global distribution networks, but they’re 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 at or 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.
However, risks remain.
Notably, many of the products that Clorox manufactures are under intense competitive pressure, especially from private label brands.
Furthermore, the company has faced a lot of headwinds in recent years resulting from currency exchange rates.
The complete exit of the Venezuelan market also says a lot about geopolitical risk, even for a consumer products company.
Shares in Clorox trade hands for a price-to-earnings ratio of 21.86, which is actually lower than the stock’s own five-year average P/E ratio of 23.6.
But that five-year average P/E ratio is, in my view, quite high.
Still, the stock’s current P/E ratio is also below the broader market, while the stock’s yield is higher than what the broader market offers.
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 7%.
That DGR is reasonable, in my opinion.
It’s lower than the 10-year demonstrated DGR, and it’s lower than the near-term forecast for EPS growth. Plus, the payout ratio is moderate.
However, the 10-year EPS CAGR is under 6%. And the most recent dividend increase was only 5%.
I’m splitting the difference. But I’m also giving this stalwart the benefit of the doubt.
The DDM analysis gives me a fair value of $119.84.
The stock thus appears roughly fairly valued right now.
Bottom line: Clorox Co. (CLX) is global consumer products powerhouse of a company, with great brands, exposure to emerging markets, and a plan for growth. Numerous fundamentals have markedly improved recently. As long as people continue to need products to clean their homes and bag their trash, investors should continue to clean up dividends and bag dividend raises.
— Jason Fieber