The Clorox Company (NYSE:CLX) , known for its namesake products, Kingsford Charcoal, Hidden Valley dressings and sauces, Glad brands, and Brita water-filtration systems, has increased total annual dividends paid to shareholders each year since 1977, with strong increases especially over the past two-years. Clorox thrives on its strong visions and initiatives instilled throughout the organization as a result of its new Centennial Strategy, which appears to have resulted in a highly engaged company workforce.
According to Donald R. Knauss, Chairman and CEO, on the topic of Clorox’s financial management,
Our cash flow is strong, allowing us to support dividend growth while continuing to pay down debt. We are taking a disciplined approach to capital spending and using our assessment of economic profit to allocate resources.
Clorox recently sold its auto-care brands, including Armor-All and STP, to the private equity firm Avista Capital Partners for $780 million in cash. According to various press statements, Clorox anticipates it will use the net proceeds from the sale to buy back its shares. In addition, Clorox claims the reason for the sale was because their auto-care brands do not align with their long-term strategy, which is focused on “health and wellness” and “sustainability” according to company statements. However, the auto-care brands were highly profitable, and it will be interesting to observe whether the company’s management actually buys back shares or allocates the capital in a more effective manner.
On the topic of shareholder return, Clorox could yield an expected annual return of 13% - 15% (plus dividends) for the investor with a ten-year holding period through 2020. All this is possible for a company that maintained a quite satisfactory compound annual growth rate of 13.47% in earnings-per-share from 2001-2010.
However, Clorox faces substantial indebtedness with long-term debt of $2,124 million and only $87 million in cash. Clorox would have to achieve constant rolling-over of debt financing in order to continue as a going concern without affecting dividend or share repurchase levels. Consequently, large-scale share repurchases or value creating transactions may be limited until Clorox pays down a significant portion of its debt principal. Unless of course, the company sells assets to make share repurchases (as witnessed by the sale of their auto-care business), which would only maintain the loss of earnings value on net.
By no means is Clorox in financial distress as their businesses generate substantial free cash flows; however, perhaps a little less debt could help their competitive advantages and future growth prospects.
Therefore, after taking the company’s debt level into consideration, maybe investors should lower their expected annual return for Clorox’s common stock, which was previously stated at 13%-15% per annum.
Disclosure: The author has no positions in CLX at the time of writing.