The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. It operates in four segments: Health and Wellness, Household, Lifestyle and International.
Clorox is a dividend aristocrat with a 44-year history of annual dividend increases. Over the past decade, Clorox has managed to increase dividends at an annualized rate of 7.50%.
The last dividend increase came in June 2021 when the Board of Directors approved a 4.50% increase in the quarterly dividend to $ 1.16 / share.
The company managed to increase earnings from $ 4.24 / share in 2010 to $ 7.36 / share in 2020. Clorox is projected to earn $ 8.38 / share in 2021 and $ 8.13 / share in 2022. The Covid-19 pandemic increased the demand for Clorox products in the short term. While it is possible that growth may slow in the short term because people fail to replenish supplies, it is also possible that we are in a new normal that would permanently increase the demand for its products.
It’s fascinating how earnings per share stayed virtually unchanged between 2010 and 2015, which put the patience of most long-time shareholders to the test.
Clorox has a portfolio of strong brand name products that are number one or two in their respective product lines, which supports pricing power. This should make it possible to pass on price increases for raw materials to customers. Future earnings growth could be driven by innovation, new product launches, cost containment initiatives and international expansion.
Clorox aims to continue delivering total return for shareholders by focusing on the company’s long-term financial goals, such as:
• Increase in net sales by 2-4 percent annually
• Earnings before interest and income taxes (EBIT) margin increase 25-50 basis points annually
• Generate free cash flow of 11 to 13 percent of sales annually
The three pillars of the strategy include expansion in geographic, category and channel directions, continuous reinvestment in its brands, and cost containment initiatives. A key driver of the strategy is to accelerate sales through the growth of existing brands, including expansion into adjacent categories, opening up new sales channels and increasing market penetration in existing countries. Increased exposure to emerging markets could further increase sales. The company also expects to leverage its strong cash flow to pursue growth opportunities and drive shareholder returns. Additionally, the company will target sales growth through product innovation, which will help its pricing power.
Clorox will also aim to increase margin and maximize cash flow by implementing a persistently robust cost savings program and maintaining the company’s price increases. The strong focus on costs has given the company a relative cost advantage over the competition. In addition, Clorox continually reinvests money in its brands, which helps it maintain its market position.
One of the risks behind Clorox is that it generates a large chunk of US revenue – over 80%. It is more dependent on the US economy than other global consumer goods companies, which could also be an opportunity. The other risk I see is that Wal-Mart (WMT) accounts for a quarter of Clorox’s sales. Wal-Mart is notorious for keeping costs down by forcing sellers to sell at lower prices. This is bad for pricing power and could affect profitability. This over-reliance on Wal-Mart could be mitigated through continued international expansion. The other risk includes generic competition, which could be mitigated by the ability to differentiate Clorox’s brands through spending on research and development and advertising.
The growth in earnings per share was supported by a gradual decrease in the number of shares outstanding. Clorox has reduced its number of shares from 141 million in 2010 to 128 million by 2020.
The payout ratio increased from 47% in 2010 to 67.73% in 2015 before falling to 58% in 2020.
Currently, the stock is slightly overvalued at 23.23 times forward earnings. Clorox gives 2.59%.