- Church & Dwight sells products that show a repeatability of purchase patterns.
- Church & Dwight expanded its fundamentals through increased customer demand and acquisitions.
- Church & Dwight possesses a good balance sheet.
Source: Church & Dwight's SEC Filings
Owning stock means you partake in the ownership of a dynamic business. As a publicly traded business owner, it is optimal that your products represent something that is highly wanted or needed on a consistent basis. It's also good for your products to represent something that people will buy on a regular basis. This helps keep demand relatively smooth both in good times and bad.
Personal products company Church & Dwight (NYSE: NYSE:CHD) represents an example of one of these companies. Church & Dwight sells products needed in everyday life, such as laundry detergent, kitty litter, toothbrushes, deodorant, vitamins, etc. These products represent things that people need to buy on a regular basis. In addition, the company sells specialty chemicals used for industrial purposes as well as animal nutrition products. Let's examine what the company has done for shareholders.
Over the past five years, Church & Dwight expanded its revenue, net income and free cash flow 31%, 51% and 27%, respectively (see chart below). It managed to expand its fundamentals through a combination of positive levers including volume gains, acquisitions and productivity gains. It's always good to see volume gains on a consistent basis. This serves as an indication that a company knows how to appeal to the final consumer. Last year, innovation helped drive Church & Dwight's fundamentals higher. This represents a way to keep people interested in the brands.
However, Church & Dwight is struggling some in FY 2015. Its year-to-date revenue expanded 4%, year-over-year. However, its net income and free cash flow declined 2% each, year-over-year. Once again, a combination of positive levers, including acquisitions, price increases and volume gains, propelled top line growth. However, growth in revenue didn't outpace the growth in expenses.
Acquisition related expenses, pension settlement charges, equity in losses from affiliates and increases in interest expenses contributed to growth in expenses. Increases in capital expenditures as well as unfavorable changes in inventory and timing of customer collections made a negative impact on free cash flow.
Church & Dwight sits on a good balance sheet. In the most recent quarter, the company possessed cash amounting to $211 million that equated to 10% of stockholder's equity. I like to see companies with cash amounting to 20% or more of stockholder's equity.
I don't like long-term debt, even in this low interest rate environment. If a company accumulates enough of it, increasing interest expense will choke out profitability and cash flow. I like to see companies with long-term debt amounting to 50% or less of stockholder's equity. In the most recent quarter, Church & Dwight's long-term debt amounted to 34% of stockholder's equity. Year-to-date operating income exceeded interest expense by 22 times. The rule of thumb for safety lies at five times or more.
Church & Dwight's fundamentals translated into a market beating total return of 184% vs 94% for the S&P 500 over the past five years (see chart below).
Church & Dwight pays a prudent dividend. I like to see companies pay out 50% or less of their free cash flow in dividends and retain the rest for other uses. So far this year this company only paid out 36% of its free cash in dividends. Interestingly, the dividend to free cash flow payout percentage resided at 36% for the past two full years.
Church & Dwight's valuation resides in the high range even after a 6% correction off its 52 week high as of this writing. Currently, the company's P/E ratio clocks in at 28 vs 19, according to Morningstar. Church & Dwight's valuation and the S&P 500's reside close to a five year high. This makes Church & Dwight's market price risk especially high.
I think that Church & Dwight will continue to focus on innovation to keep the final consumer interested. I also think that Church & Dwight will make strategic acquisitions that will complement the company's product portfolio. Company management demonstrates prudence in handling its balance sheet. These factors will continue to drive its fundamentals forward. However, I think that its shares hover in the high range. Investors may want to take a small position, while adding during market corrections.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.