Behind The Wipes: A Closer Look At Clorox’s Attractiveness As A Dividend Stock (NYSE:CLX)

Introduction

I’m a fan of consistent dividend growth stocks in the consumer defensive sector. What sets these businesses apart is the mix of steadily rising dividends and often anti-cyclical consumer demand.

In this sector, I own PepsiCo (PEP), which is one of my favorite dividend growth stocks among its peers.

Furthermore, on my watchlist, I have similar companies like Hershey (HSY), Mondelez International (MDLZ), and Costco (COST).

I’m also watching a few recovery plays like Kraft Heinz (KHC) and Conagra Brands (CAG).

One of the stocks I have never discussed on Seeking Alpha, nor anywhere else, is the Clorox Company (NYSE:CLX).

Founded roughly 110 years ago, the company has one of the most well-known brand names, which got even stronger during the pandemic when people rushed to buy its wipes and other hygienic products.

Unfortunately, the pandemic rally has been wiped out. Over the past ten years, CLX has returned 102%. That’s below the already disappointing performance of the consumer staples ETF (XLP) and a mile below the 209% total return of the S&P 500.

Even going back to 1999, CLX has failed to outperform the XLP ETF – including reinvested dividends for both assets – as the CLX/XLP total return ratio below shows.

In light of this poor performance, I decided it is time to shed some light on this company, which comes with a terrific dividend growth history.

Buying Consistently Rising Income With Clorox

In a highly fragmented market, Clorox stands out for its extensive and trusted brand portfolio, including household names such as Clorox, Pine-Sol, and Glad.

With products ranging from cleaning and disinfecting solutions to personal care items, Clorox has built a well-diversified product portfolio.

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Even better, the company holds a leading position in the consumer and professional product markets, with a global footprint covering roughly 25 countries.

To give you a few facts:

• 80% of the company’s product portfolio has a number one or two market share.
• 90% of households in the U.S. have Clorox products.
• 76% of its products offer superior consumer value.

Especially, product innovation and brand building have allowed the company to take its products to another level in recent years.

In order to fuel growth, the company’s IGNITE strategy sets it apart by emphasizing innovation across key business areas.

The strategy focuses on fueling long-term, profitable growth, enhancing consumer experiences, transforming work processes, and evolving the product portfolio.

Clorox is also known for its dividend.

The current yield is 3.4%, which is based on its $1.20 per share quarterly dividend ($4.80 per year). This fiscal year (2024), analysts expect the company to generate $4.59 in EPS, which means it has a payout ratio over 100%.

However, next year, EPS is expected to increase to $6.02, which will bring the dividend coverage back to normal levels.

The most recent dividend hike was on July 28, 2023.

Back then, the company hiked by 1.7%. This hike was the company’s 21st consecutive annual dividend hike. The five-year dividend CAGR is 5.1%.

At this point, I also need to mention that the dividend, and the business in general, is protected by a healthy balance sheet.

This year, the company is expected to end up with $2.5 billion in net debt, which is roughly 2.3x EBITDA.

In its 2025 fiscal year, these numbers are expected to decline to $2.4 billion and 1.8x EBITDA.

The company has a BBB+ credit rating, which is one step below the A range.

Now, the question is, when is growth returning? After all, a ~3% yield isn’t very appealing when dealing with slowing dividend growth and a history of stock price underperformance.

How Attractive Is Clorox?

Before we dive into its financials, let’s take a look at the risk/reward.

Using the data in the chart below, the company is trading at a blended P/E ratio of 29.5x. This is well above the long-term normalized valuation multiple of 21.7x.

This year, EPS is expected to decline by 10%, potentially followed by 31% growth in FY2025 and 5% growth in FY2026.

When combining EPS growth expectations with its normalized valuation, we get a fair price target of $137, which is a bit below its current price. The current consensus price target is $139.

In other words, in order to make the case that CLX is a good investment at these prices, we need to either make the case that growth expectations are too low or that the market will allow CLX to trade at an elevated multiple a bit longer.

Ideally, both happen.

Going back to its most recent financial numbers (1Q24), the company faced a 20% decline in net sales, primarily driven by lower shipments due to operational disruptions caused by a cyberattack.

The net sales decline was also attributed to lost consumption resulting from the widespread disruption.

As previously disclosed, incremental costs were incurred by the company as the result of a cyberattack. These costs relate primarily to third-party consulting services, including IT recovery and forensic experts and other professional services incurred to investigate and remediate the attack, as well as incremental operating costs from the resulting disruption to the company’s business operations. – Clorox 1Q24

Despite these challenges, the gross margin for the quarter increased to 38.4%, representing a 240 basis points improvement from the prior year.

This improvement was fueled by pricing actions, cost savings, and supply chain optimization, offsetting factors like unfavorable foreign exchange rates and higher commodity costs.

Selling and administrative expenses as a percentage of net sales increased to 19.9%, compared to 15.0% in the year-ago quarter. This increase included strategic investments in digital capabilities and incremental charges related to the aforementioned cyberattack.

Adjusted earnings per share came in at $0.49, which translates to a 47% decline from the year-ago quarter.

Needless to say, the company also updated its full-year 2024 outlook to account for the impact of the cyberattack.

The company’s first priority is to rebuild customer inventories, and the updated outlook assumes this rebuilding will mostly occur by the end of the second quarter.

The full assortment restoration on shelves for all products may take longer, with the pace of recovery varying by business.

• The company now expects net sales to decline mid- to high-single digits for the fiscal year, considering the impact of the cyberattack.
• The outlook factors in several weeks of lost consumption in the first and second quarters, along with reduced distribution and lower market shares as the recovery progresses.
• Second-quarter organic sales are expected to be up mid-single digits, driven by restocking customer inventory levels.

Adjusted EPS is anticipated to be between $4.30 and $4.80, reflecting a decrease of 16% to 6%. These projections exclude certain charges related to long-term strategic investments, the streamlined operating model, and the cyberattack.

Note that FY24 EPS analyst estimates are at $4.59, which is a bit above the company’s guidance midpoint of $4.55.

All things considered, I am giving CLX a Buy rating. This is based on its fair valuation and efforts to streamline the business. On a long-term basis, I believe this is enough to avoid a Neutral rating.

However, it is not a high-conviction rating. As much as I like its products and efforts to return to consistent growth, I can buy alternatives with similar yields and higher dividend growth.

I do not feel tempted to add this stock to my portfolio, especially not because it also failed to outperform its peers when it wasn’t dealing with cyber issues and consumer weakness.

Takeaway

Clorox, known for its brands and history of dividend growth, has suffered from recent challenges, including a cyberattack and consumer weakness.

The company faces a decline in net sales, with efforts to rebuild customer inventories.

While the dividend is supported by a healthy balance sheet, growth expectations and valuation raise some concerns, as the current fair price target is below the current market price.

Although I give CLX a Buy rating based on its growth potential and business streamlining efforts, it’s not a high-conviction decision.