The Clorox Company (CLX) is famous for its household products such as its bleach, but the chances are that you will also be familiar with other products, such as Formula 409, Pine-Sol, Liquid PlumR, Glad garbage bags, Kingsford charcoal, Brita water filters and many others. These brands are quite literally "household" names and have built lifetime loyalty among consumers because of reliability and quality. Today, 90% of the company's products rank first or second as measured by market share in their respective categories. The percentage of its portfolio performing strongly in consumer preferences grew from 34% in 2007 to 48% in 2012.
Revenues have shown a slow and steady increase over the past ten years from $4.14 billion in 2003 to $5.47 billion in 2012 which works out to an average annual growth of just over 3%. During the same period, net income has grown by a slower rate of approximately 1% annually from $493 million to $541 million and operating margins have remained steady in the range of 9% to 11%. However, despite these low rates of growth, EPS has nearly doubled from $2.23 per share to $4.09 per share and this faster rate of growth has been caused by the large numbers of shares which have been repurchased. Outstanding shares have declined in the same decade from 221 million to 132 million. The average estimate for 2013 for EPS for Clorox is $4.30 per share and the 2014 estimate is $4.63 per share.
The company has recently increased dividends by just under 11% to $0.71 per share and this is the 36th consecutive year in which the dividend has been increased and the rate of growth has been just below the EPS growth. This dividend works out to an attractive annual dividend yield of approximately 3.2%, which is considerably more than the yield on conventional fixed income securities. Assuming that the company and the dividend continue to grow, investors are also protected against inflation.
A look at two peers in the cleaning business
Church & Dwight (CHD) manufactures and sells a variety of household, personal care and specialty products. For the first quarter, volume growth of 2.4% was partly offset by lower pricing resulting in a revenue growth of 2%. However, the operating margin improved to 21.7% because of better operational efficiencies and cost management. Arm & Hammer, the company's core brand, has grown net sales by 10% annually in the last few years hitting $1 billion in annual sales and this growth can be credited to innovation and better marketing. The personal care business has been left behind by the lower margin household products and the company has moved to correct this with its acquisition of a leading gummy vitamin business Avid Healthshows. The company lacks the financial muscle and the economies of scale when it faces competition such as Procter & Gamble (PG) in some of its product categories. Though it is making the right moves, I do not believe that this is a good time to invest in the company's stock.
Zep (ZEP), which is in the business of providing cleaning and maintenance chemicals and the associated press and services, has reported solid second quarter results. EPS at $0.12 a share has grown by more than 9% over the same quarter of the previous year. Revenues grew by almost 8% to $163.4 million and net income was up more than 14% at $2.8 million. The company will focus on integrating the vehicle care business and the acquisition of Ecolab's vehicle-care division for $120 million should give the company a higher profile among car, truck and fleet wash operators. This is a growth stock to which serious consideration should be given.
The bottom line for Clorox
The company has a clear and easy to understand strategy which is building a large market share in medium sized product categories. These categories do not attract the attention of companies which are larger and have more financial resources, and well established brands and loyal customers should keep the money coming in. However, the stock has already risen approximately 20% this year and is now pricey when you consider price/earnings multiples. Investors looking for exposure in the consumer goods sector should put Clorox and on their watch list and wait for a pullback.