- Clorox recently increased its dividend by 14%, and has raised its dividend for 41 consecutive years.
- Margins are under pressure from rising raw materials and transportation costs, but product innovation and price increases will fuel growth.
- With a 3% yield, Clorox is a high-quality holding for dividend growth.
By Bob Ciura
Investors looking for high-quality dividend growth stocks, can really clean up with consumer staples stocks like The Clorox Company (NYSE:CLX). Clorox has increased its dividend for over 40 consecutive years, which places it on the list of Dividend Aristocrats. The Dividend Aristocrats are a group of 53 stocks in the S&P 500 Index, with 25+ years of consecutive dividend increases. You can see all 53 Dividend Aristocrats here.
Clorox recently extended its dividend growth streak to 41 years, with a 14% dividend increase on February 13th. This is yet another indication that household products companies like Clorox are strong holdings for dividend growth. Clorox has a diversified portfolio of strong brands. Its products are used every day by millions of households, even during recessions, which allows Clorox to raise its dividend each year like clockwork.
The recent dividend increase elevates Clorox’s dividend yield to 3%. Clorox’s dividend yield is well above the S&P 500 Index average yield, which is now below 2%. Clorox remains a high-quality holding for dividend growth investors.
Clorox also has a diversified product portfolio, which consists of household cleaning products, food, and cat litter, among others. Its core brands include Clorox, Pine-Sol, Glad, Kingsford, Hidden Valley, Brita, Burt’s Bees, Fresh Step, and RenewLife. As you can see in the following image, over 80% of the company’s global sales are derived from products that hold either the #1 or #2 market share in their respective categories.
Source: 2017 Analyst Day Presentation, page 11
Clorox generates annual sales of $6 billion. Its core product categories are household and cleaning, which each represent approximately one-third of total sales. Lifestyle products represent 16% of sales, with the remainder of sales generated in the international markets.
Clorox’s products enjoy strong demand, which leads to volume growth, while its top brand positioning allows for pricing power. Volume growth and price increases are critical drivers of growth for a consumer products manufacturer.
Clorox generated sales and earnings per share growth rates of 4% and 9% in fiscal 2017, respectively. Volumes rose 6% for the year, driven by growth in all core operating segments. Earnings per share were $5.35 for the year.
The company is off to a good start to fiscal 2018 as well. The fiscal second quarter was mixed, in terms of how the results stacked up against analyst expectations. Excluding the impact of tax reform, quarterly earnings per share of $1.23 were in-line, but revenue of $1.42 billion missed expectations by about $10 million. Earnings were under pressure, from rising commodity and logistics costs. As a result, gross margin fell about 170 basis points from the same quarter a year ago.
That said, the company reported growth from the same quarter last year. Sales and volumes increased 1%. Despite margin pressure, adjusted earnings per share increased 7.9% year over year. And, Clorox gave very strong guidance for 2018. The company expects full-year sales growth of 1% to 3%. Earnings per share are expected in a range of $6.17 to $6.37, while analysts were expecting just $5.66 consensus. At the midpoint of earnings guidance, Clorox expects 17% earnings growth in 2018.
Clorox has positive growth prospects going forward. Perhaps its biggest competitive advantage that will fuel its future growth, is product innovation. Clorox maintains a goal of adding 3% to annual sales from product innovation.
Source: 2017 Analyst Day Presentation, page 58
Clorox invests heavily in research and development, to stay ahead of new trends. This is critical for consumer goods companies. Going forward, Clorox is counting on innovation in cleaning products, cat litter, and water filters, to fuel continued forward growth. One particularly promising example of this is Clorox’s connected Brita water filters. These are Wi-Fi-enabled water filters, that will automatically re-order new filters when necessary.
This would allow Clorox to participate in new technological advancements, such as the Internet of Things. In the following image, you can see more examples of Clorox’s innovation at work.
Source: 2017 Analyst Day Presentation, page 59
Another growth catalyst for Clorox is e-commerce. As consumers shift more of their spending online, product manufacturers like Clorox are investing in their own e-commerce businesses, to keep up. E-commerce revenue has grown at a 37% compound annual rate over the past three fiscal years. E-commerce sales were $225 million in fiscal 2017, about 4% of the company’s total sales. Clorox expects e-commerce sales to reach $500 million by 2020.
Lastly, the professional channel is a growth catalyst for Clorox moving forward. Clorox is mostly known as a consumer-facing company, but considering the company’s strong brands, it makes perfect sense to move into professional sales as well. Clorox is doing just that, particularly in the cleaning, foodservice, and healthcare industries. Sales in the professional channel have grown at a 10% compound annual rate over the past three years.
After the 14% dividend increase, Clorox’s new quarterly dividend rate will rise to $0.96 per share. On an annualized basis, the new dividend rate is $3.84 per share. The dividend increase brings Clorox’s dividend yield up to 3%, which is a strong payout, compared with the index average. The S&P 500 yields less than 2% right now, making Clorox an attractive choice for income investors.
Clorox is a shareholder-friendly company. It returns significant cash to shareholders each year, through both dividends and share repurchases.
Source: 2017 Analyst Day Presentation, page 86
Clorox’s dividend is highly secure, with room for continued increases going forward. Based on expected 2018 earnings per share of $6.17 to $6.37, and the new dividend rate of $3.84, Clorox will have a dividend payout ratio of 60% to 62% this year. Even after the recent 14% dividend raise, Clorox easily covers its dividend payments.
Since earnings are likely to continue growing, so too should the dividend. Clorox may not always be able to match its 14% dividend increase in future years, but investors can still look forward to consistent dividend raises each year, at least in the mid-single digit range. With a 3% forward dividend yield, Clorox stock has an attractive mix of dividend yield and growth.
Household products manufacturers like Clorox are not the most exciting businesses. But they do offer stability, even during economic downturns. Clorox has increased its dividend each year since 1977, a period of time that has included multiple recessions and periods of global strife. With a strong brand portfolio, benefits of scale, and product innovation, Clorox should have little trouble continuing to increase the dividend each year.
Investors looking for high-quality dividend growth stocks, should consider the Dividend Aristocrats, which have raised their dividends for 25+ consecutive years. The Dividend Aristocrats have significantly outperformed the S&P 500 Index in the last 10 years. Their outperformance is likely to continue moving forward, as the Dividend Aristocrats have strong brands and durable competitive advantages. Clorox is a Dividend Aristocrat. Find out if it is cheap enough to buy with our service Undervalued Aristocrats, which provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.
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