Clorox: A Reasonably Valued, Dividend Growth Stock

On Monday, I initiated a position in The Clorox Company (CLX), which is a global manufacturer and marketer of consumer products. Along with its flagship Clorox line, the company also manufactures household brands such as Armor All, Glad, Pine Sol and Brita. The company was actually acquired and divested from Procter & Gamble (PG) back in the 1960's. "We make everyday life better, every day" is the company's slogan.

What I Like About Clorox

Going back to 1913, Clorox has been focused on its brands. Continuing to drive earnings through marketing, innovation, and distribution is the company's aim. At its core Clorox is a packaged chemicals company, more specifically a bleach company, however the company is evolving in an innovative direction. The recent acquisition of natural products company Burt's Bees, as well as the company's timely launch of its Green Works natural cleaning products line should be the catalysts for growth. These are two steps that I believe puts Clorox on a very solid footing for growth.

The Valuation

Given the recent fears of a U.S. recession, consumer staple stocks have been in rally mode because of a flight to safety. These companies are seen as safe havens against recession as several of the goods that they manufacture would be purchased in spite of tough economic times. Stocks such as McDonalds (MCD), Colgate-Palmolive (CL), and Procter & Gamble have really run up in this environment and I would not currently consider them to be attractively valued due to this. Clorox has actually been an exception to this rule as some downward earning revisions and commodity cost (specifically resin) issues have had investors selling off this stock.

Here are some of the key metrics for CLX that tend to indicate that the stock is a very reasonable value today:

Its current P/E of 17x is at, or near, a 10-year low.

Its current P/Sales of 1.57 is at, or near, a 10-year low.

The stock is undervalued by over 10% according to my conservative valuation model, which is based on an earnings growth rate of 10%, and a P/E of 17x earnings.

Its current dividend yield of 2.8% is a 10-year high point.

The stock is trading at 2005 levels, and CLX's EPS is $3.31 compare with $2.89 in 2005.

Dividends and Earnings History

CLX has a solid history of consistency in earnings and dividend growth. Earnings have grown at an average compounded rate of about 10% over the past five years. During the same period, dividends paid have grown by just over 12% average per annum. The company's latest dividend increase was by 29%.

Summary

I think Clorox is a stable, boring, and excellent company with a bright future ahead of it. Its foray into natural products should prove to pay dividends, as Clorox will likely be the cost leader in this area, right out of the gate. Rising commodity costs are currently cutting into Clorox's margins, however I see this as a temporary situation, and it can likely pass on some of the burden. Implementing cost controls as well as getting past the restructuring costs associated with the Burt's Bees acquisition should put Clorox in a position to continue to grow earnings as the Burt's Bees and the Green Works line pan out.

On the solid base of its brands, strong marketing and innovation, and a weak U.S. dollar, CLX should excel domestically and internationally. This is a rare opportunity to get a household name, and a great dividend growth company on the cheap.

Disclosure: The author owns CLX.

Comments

[User 174681]

I think you are right on the money.

Other blog like the one below thinks so too

lt-trader.blogspot.com/

[bill greene]

As a contrarian, I look for good stocks that are out of favor. Clorox is just such a stock. If you concentrate on this kind of quality and safe investment you get to sleep well at night. And, if you buy them when they're down, the appreciation and yield will be that much better. Clorox qualifies right now as a buy and hold stock--by holding it long-term you minimize transaction fees and income taxes. I'm going to add to my Clorox holdings at this price