Clorox: Worth The Premium In The Long Term

| About: The Clorox (CLX)

Summary

Clorox Co. dividend is 2.4% and has been increased for each of the last ten years and its dividend growth rate is 7.27% over the past 5 years.

Clorox Co. business can continue its steady upward growth trend benefiting from its increasing number of established products being enhanced and new products in development.

Clorox Co. total return over performed the Dow for the 41.5 month test period by a strong 57.04%.

This article is about Clorox Co. (NYSE:CLX) and why it's a income and total return company that is being reviewed by The Good Business Portfolio. I have been seeing CLX mentioned in many articles on Seeking Alpha and other sites and wanted to take a look at it.

The Clorox Company is a United States-based manufacturer and marketer of consumer and professional products. The company sells its products through mass retail outlets, e-commerce channels, distributors, and medical supply providers. Fundamentals of Clorox Co. will be looked at through the following topics: the Good Business Portfolio guidelines; total return and annual dividend; last quarter's earnings; company business overview; and takeaways and recent portfolio changes.

Good Business Portfolio Guidelines

Clorox Co. passes 9 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don't break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average.

Clorox Co. is a large-cap company with a capitalization of $17.0 billion. Clorox Co. has good steady cash flow of $750 Million to be used when the opportunity occurs to develop new and enhanced existing products.

Clorox Co. has a dividend yield of 2.4% and its dividend has been increased for ten of the last ten years. The payout ratio of the dividend is high at 70%. The dividend is about average for the market but constant yearly increases of 7% make it a choice for the income investor who wants to own a quality business. Remember one of my guide lines, think of yourself as an owner of the business , you are, would you buy the whole company if you could.

Clorox Co. therefore is a income story with the company to continue to add new products and enhanced products for growth. At the last stock holders meeting management raised its guidance on new products to increase revenue in the 2-4% range.

Clorox Co. quarterly earnings is good at $0.80/share which leaves Clorox Co. good cash flow, allowing it to pay its average dividend and have some left over for its continued product growth investments. The average dividend payout ratio over the last 5 years is 70%, a bit high but not excessive.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% more for a yearly distribution of 5%. Clorox Co. has a past three-year CAGR of 8% more than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $22,900 today (from S&P IQ). This makes Clorox Co. a good investment for the income and total return investor with its steady 7% increasing dividend and fair earnings growth.

Clorox Co. S&P Capital IQ rating is a strong sell on valuation with a target price of $119 using the 5 year PE ratio of 23.0 a bit higher than I like. Clorox Co. is overpriced at present but a good choice for the income and total return investor that is a long term investor. I have been looking for another company that is like Johnson and Johnson (NYSE:JNJ) and Clorox Co. is as close as I have seen recently but at a premium price.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Clorox Co. did better than the Dow baseline in my 41.5 month test compared to the Dow average. I chose the 41.5 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the losing year of 2015 and the slightly higher year of 2016 YTD. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The great total return makes Clorox Co. appropriate for the growth investor with the 7.27% dividend growth good for the income investor. The dividend is average for the market and is easily covered by the earnings. The dividend has been increased for 10 of the last ten years and the last increase was recently increase by 3.9% to $0.80/Qtr. DOW's 41.5 month total return baseline is 34.89%. The total return during the test period for CLX is fantastic at 91.93% strongly beating the DOW baseline by a strong 57.04%.

Dow Baseline 34.89%

Company Name

41.5 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Clorox Co.

91.93%

57.04%

2.4%

Click to enlarge

Last Quarter's Earnings

For the last quarter on May 3, 2016 Clorox Co. reported earnings that beat expected earnings at $1.21 compared to last year at $1.08 and expected at $ 1.10. Revenue was higher at $1.42 Billion or +1.4% year over year increase and $10 Million above expected revenue. This was a great report. Clorox Co. increased their guidance to $4.85 -4.95 for the year. The steady growth in Clorox Co. should provide a company that will continue to have above average total return and provide steady income for the income investor if held long term to overcome the premium.

Business Overview

The Clorox Company is a United States-based manufacturer and marketer of consumer and professional products. The Company sells its products through mass retail outlets, e-commerce channels, distributors, and medical supply providers.

The Company operates through strategic business units that are aggregated into four reportable segments: Cleaning, which consists of laundry, home care and professional products marketed and sold in the United States; Household, which consists of charcoal, cat litter and plastic bags, wraps and container products; Lifestyle, which includes food products, water-filtration systems and filters and natural personal care products, and International, which consists of products sold outside the United States, such as laundry, home care, water-filtration, charcoal and cat litter products, dressings and sauces, plastic bags, wraps and containers and natural personal care products.

At the last earnings call, Clorox CEO Benno Dorer said:

Looking just at the U.S., sales grew 4% reflecting growth in all three U.S. segments. From a market share standpoint, our U.S. 13-week share increased 0.2 of a point versus the year ago quarter, ending the quarter at 23%. Our investments in higher margin, faster-growing businesses are continuing to drive improvement as this was the fifth consecutive quarterly increase in market share.

This growth in many of the other product lines is also going on to keep CLX on its steady moderate growth course. Clorox Co. has a negative factor that being the strong dollar. The economy is showing weakness right now and I think the FED will be on hold for at least 3 months if not longer and raise rates slowly if at all in 2016 which will moderate the dollar strength.

Takeaways and Recent Portfolio Changes

Clorox Co. is an investment for the total return and income dividend growth investor but its price is at a 10% premium. Considering Clorox Co. steady dividend growth of 7%, its current dividend yield of 2.4% and its fantastic total return better than the Dow average, Clorox Co. will be strongly considered for The Good Business Portfolio when a open slot is available. One negative for Clorox Co. is the strong dollar but is being overcome by product innovation. Overall, you can pay a premium for a quality company as long as you are a long-term investor, like me.

Bought more OHI to make it a full position of 4.1% of the Good Business Portfolio. So now we just watch it grow until it reaches 8% of the portfolio. The dividend should be increased in mid July 2016 continuing the quarterly increases of $0.01/Qtr.

Trimmed Johnson & Johnson from 8.9% of the portfolio to 8.4% of the portfolio, must have good portfolio management and not let any one company get much above 8% of the portfolio. I love JNJ, it pays a 2.8% dividend grows at 8-10% a year and is defensive, JNJ should be in all portfolios.

Sold some covered calls on Harley Davidson (NYSE:HOG), sold July 45's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson is 8.4% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 8.0% of the Portfolio, Altria Group Inc. (NYSE:MO) is 7.9% of the portfolio, Eaton Vance Enhanced Equity Fund II (NYSE:EOS) is 7.0% of the Portfolio and Walt Disney (NYSE:DIS) is 6.9% of the portfolio.

Therefore BA and JNJ are now in trim position with Altria Group Inc., Home Depot, Eaton Vance equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen.

For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.

I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Disclaimer: Of course this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, HD, JNJ, MO, DIS, EOS, HOG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.