Clorox's Strong Dividend Has More Room To Grow

| About: The Clorox (CLX)

The Clorox Company (NYSE:CLX) is a diversified global consumer and international products company that operates in four segments: Cleaning, Lifestyle, Household, and International. Each segment sell products under well-known brand names:

Segment Brands
Cleaning Clorox, Clorox 2, Formula 409, Liquid-Plumr, Pine-Sol, S.O.S, Tilex brand names, and Green Works
Lifestyle Hidden Valley, K C Masterpiece, Brita, and Burt's Bees
Household Glad, Fresh Step, Scoop Away, Ever Clean, Kingsford and Match Light
International Clorox, Javex, Glad, PinoLuz, Ayudin, Limpido, Clorinda, Poett, Mistolin, Lestoil, Bon Bril, Nevex, Brita, Green Works, Pine-Sol, Chux, Kingsford, Fresh Step, Scoop Away, Ever Clean, K C Masterpiece, and Hidden Valley
Click to enlarge

Source: Yahoo Finance.

CLX sells its products through a variety of channels, including retail stores (mass merchandisers, warehouse clubs, retail stores, grocery stores, and grocery wholesalers), direct sales teams, and a broker network. CLX had about $5.2 billion in revenue for the fiscal year ending in June 2011 with $557 million of net income. Revenue is flat compared to the previous year and slightly up from the year before. CLX has a market capitalization of $8.7 billion and an enterprise value of $11.5 billion, suggesting some leverage. CLX has a trailing twelve month PE ratio of 15.7x. The international segment is 21% of total revenue and is also the fastest-growing segment over the past 2 years.

CLX's estimated forward dividend yield is 3.7% based upon a closing price of $66.44 and the author's projected annual dividend of $2.45. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends. CLX has a clear record of consistent growth that is usually close to or better than 10%.

Type Ex-Dividend Date Quarterly Dividend ($ per share) Change from prior year
Projected 7/25/2012 0.650 8.3%
Projected 4/25/2012 0.600 9.1%
Projected 1/25/2012 0.600 9.1%
Projected 10/25/2011 0.600 9.1%
Historical 7/25/2011 0.600 9.1%
Historical 4/25/2011 0.550 10.0%
Historical 1/25/2011 0.550 10.0%
Historical 10/25/2010 0.550 10.0%
Historical 7/26/2010 0.550 10.0%
Historical 4/26/2010 0.500 8.7%
Historical 1/26/2010 0.500 8.7%
Historical 10/26/2009 0.500 8.7%
Historical 7/23/2009 0.500 8.7%
Historical 4/23/2009 0.460 15.0%
Historical 1/26/2009 0.460 15.0%
Historical 10/24/2008 0.460 15.0%
Historical 7/24/2008 0.460 15.0%
Historical 4/23/2008 0.400 29.0%
Historical 1/24/2008 0.400 29.0%
Historical 10/29/2007 0.400 37.9%
Historical 7/25/2007 0.400 37.9%
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Source: Author estimates, Yahoo Finance.

The following graph shows the historical trailing-twelve-month yield and spread to the 10-year Treasury bond.

Created with data from Yahoo Finance.

CLX's dividend yield is close to a 15-year high right now. The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.

Created with data from Yahoo Finance.

The above chart shows that CLX has underperformed its dividend increases, suggesting that either it is now undervalued or that future growth prospects are declining. The graph also shows that the dividend yield is close to the high dividend yield during the downturn in the Spring of 2009. However, the quarterly data presented earlier shows that today's annual dividend is around $2.45 compared to the annual dividend of $1.78 in early 2009.

Dividend Discount Model Suggests CLX is Undervalued

The first step to using the dividend discount model is to calculate an equity hurdle rate with the Capital Asset Pricing Model. CLX has a beta of .35, and with the risk-free rate at a very low 1.9%, this puts the discount rate at 4.4%. As noted above, the forward dividend is approximately $2.45. Applying a long-term growth rate of just 1% gives an estimated price of $73.05 for CLX, which suggests an undervaluation with very low growth. Raising the growth rate would result in an even higher valuation due to the extremely low equity hurdle rate.

One of the challenges of the low interest rate environment is that many dividend stocks appear to be undervalued if they have a relatively low beta. This is the case for CLX, especially given its high recent dividend growth rates. With a 67% payout ratio to net income, 43% to operating cash flow, and 64% to OCF less capital expenditures, there is room for dividend growth without improvement in the underlying financial metrics.

Icahn Gives Up On CLX

Noted investor Carl Icahn, CLX's largest shareholder with approximately 10% the outstanding shares, removed his slate of directors from consideration. Icahn had been pushing for a sale of the company and had offered to purchase the company for $80 per share. Icahn believes that CLX is worth subtantially more than its current market price; however, he has withdrawn his bids.

While the city of Oakland might be happy in saving some jobs (CLX had already announced that it would move up to 700 employees to its new Pleasanton campus), CLX shareholders are probably disappointed. However, the potential that Icahn saw in the company is still there. CLX is definitely an interesting opportunity that is worthy of additional research and analysis. However, one critical question is whether CLX represents one of the best dividend investment opportunities in today's market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.