Dividend Aristocrats In Focus Part 47: Clorox

| About: The Clorox (CLX)

This post was written by Bob Ciura on November 21, 2016, for Sure Dividend

Clorox (NYSE:CLX) is a household name. The company started out over 100 years ago with the debut of Clorox liquid bleach in 1913.

At that time, Clorox was called the Electro-Alkaline Company. And it was struggling - although not for a reason you might think.

When it first started, Clorox's initial founders knew how to manufacture the product. But they had great difficulty in marketing and distribution.

That's when two early investors, William and Annie Murray, came to the rescue. They had great conviction in Clorox bleach, and were determined to succeed. They spearheaded an aggressive marketing effort, streamlined the operations, and arranged new financing.

They began marketing Clorox directly to homemakers as a first-of-its kind disinfectant. It worked like a charm.

Clorox is a Dividend Aristocrat, and has raised its dividend each year since 1977.

The Dividend Aristocrats Index is comprised only of S&P 500 stocks with 25+ years of consecutive dividend increases. You can see the entire list of Dividend Aristocrats here.

Keep reading this article to learn more about the investment prospects of Clorox.

Business Overview

Clorox is a diversified consumer products company. It operates in four business segments:

  • Household (33% of sales)
  • Cleaning (33% of sales)
  • Lifestyle (17% of sales)
  • International (17% of sales)

The Household segment includes the Glad, Kingsford, Fresh Step, and Renew Life.

The Cleaning segment includes the Clorox, Pine-Sol, and Clorox Commercial Solutions businesses.

Lifestyle brands include Hidden Valley, Burt's Bees, and Brita.

Lastly, the International segment houses Clorox's brands that are sold all over the world. Clorox's international reach extends to Latin America, Canada, Australia, and a small collection of other nations.

Clorox enjoys high market share across its portfolio.

Click to enlarge

Source: 2017 Q1 Earnings presentation, page 3

Business conditions are broadly challenging, but still supportive of growth. Headwinds facing the company include slowing economic growth in the emerging markets and the strong U.S. dollar. Despite this, Clorox's earnings per share increased 13% in fiscal 2016.

Clorox management's long-term strategy is to grow total sales by 3%-5% per year. It will rely on product innovation and growth in new channels to meet its goal.

Growth Prospects

One of the biggest growth catalysts for Clorox moving forward is expansion into new product categories. Clorox has diversified its portfolio in recent years through acquisitions designed to make progress in emerging areas.

For example, Clorox recently acquired Renew Life, a maker of probiotics, shakes, and other nutritional products.

Click to enlarge

Source: 2017 Q1 Earnings presentation, page 19

It is easy to see why management has targeted the health-and-wellness category. The probiotics industry is expected to grow at a 15% compound annual rate going forward. This is because, according to Clorox, two-thirds of Americans suffer from some sort of intestinal health issue.

Another growth catalyst is innovation. Clorox is increasing its research and development spending to develop new products. For example, last year's R&D spending rose 13% in the past two years. This spending has paid off.

Click to enlarge

Source: 2017 Q1 Earnings presentation, page 24

Innovation has enabled Clorox to release new products that meet changing consumer preferences.

One example is 'connected' Brita water filters, a Wi-Fi-enabled water filter that automatically re-orders new filters when necessary. Another example is Glad trash bags with anti-microbial lining, to help prevent the spread of germs.

These product innovations continue to provide the company with industry-leading market share rates in its core focus areas.

Separately, digital media and e-commerce are compelling growth drivers going forward.

Clorox has accelerated its investments in new media platforms. Over 40% of the company's media spending is now allocated to digital media. This compares with 22% of media spending in fiscal 2013.

E-commerce is growing rapidly. Clorox's e-commerce sales growth in fiscal 2016 was double the rate of growth three years earlier.

Competitive Advantages & Recession Performance

Clorox's main competitive advantage comes in terms of its strong brands. Approximately 80% of the company's brands hold either the number one or number two market share position in their respective categories.

When consumers think of bleach, they think of Clorox. This helps insulate the company against generic competition taking market share. And, it allows Clorox to charge premium prices for its products.

To keep brand retention high among consumers, Clorox invests significant resources in advertising. Its advertising spending over the past few years is as follows:

  • 2016 advertising spend of $587 million
  • 2015 advertising spend of $523 million
  • 2014 advertising spend of $503 million

Another advantage of Clorox's business model is that its products are used each day in millions of households, regardless of the overall economic climate. Everyone needs to clean their home, whether the economy is expanding or in recession.

This allows the company to remain profitable during recessions.

Clorox's earnings per share through the Great Recession are shown below:

  • 2007 Earnings per share of $3.23
  • 2008 Earnings per share of $3.24
  • 2009 Earnings per share of $3.81
  • 2010 Earnings per share of $4.24

As you can see, Clorox increased earnings per share each year throughout the recession. This indicates its defensive, recession-resistant business model.

Valuation & Expected Total Return

Clorox stock trades for a price-to-earnings ratio of 23. This is slightly below market averages. The S&P 500 Index holds a price-to-earnings ratio of 25.

However, Clorox is valued above its own average going back many years. Since 2000, the stock held an average price-to-earnings ratio of 18.

It seems Clorox stock is fairly valued given today's low interest rate environment.

As a result, future expected returns will be made up of earnings per share growth.

A breakdown of potential shareholder returns going forward is as follows:

  • 3%-5% organic revenue growth
  • 1% growth from acquisitions
  • 1% margin expansion
  • ~3% dividend yield

Based on this, shareholders can expect to earn 8%-10% annualized returns going forward.

Final Thoughts

Clorox is as steady as they come in the stock market. The company generates modest, but reliable, growth each year like clockwork.

Owning Clorox stock may not be the most exciting thing in the world, but there is something to be said for stability. Clorox has increased its dividend each year for more than three decades. And, the stock offers a solid 2.8% dividend yield.

The company's stability and above-average dividend yield help it to rank in the top 33% of stocks with 25+ years of steady or rising dividends using The 8 Rules of Dividend Investing.

There will always be a need for cleaning products and other household goods like trash bags, cat litter, and charcoal. As such, Clorox should see steady demand moving forward, which will support its dividend and annual dividend growth for many years to come.