Clorox (CLX, Financial) is a household name. The company started out over 100 years ago with the debut of Clorox liquid bleach in 1913.
At that time, Clorox was called the Electro-Alkaline Company. And it was struggling—but not for a reason you might think.
When it first started, Clorox’s founders knew how to manufacture the product, they just had trouble with marketing and distribution.
That is when two early investors, William and Annie Murray, came to the rescue. They had great conviction in Clorox bleach and were determined for it to succeed. They spearheaded an aggressive marketing effort, streamlined operations and arranged new financing.
They began marketing Clorox directly to homemakers as a first-of-its-kind disinfectant. It worked like a charm.
Clorox is a Dividend Aristocrat and has raised its dividend each year since 1977.
The Dividend Aristocrats Index is comprised only of S&P 500 stocks with at least 25 years of consecutive dividend increases. You can see the entire list of Dividend Aristocrats here.
Keep reading to learn more about the investment prospects of Clorox.
Business overview
Clorox is a diversified consumer products company. It operates in four business segments:
- Household (33% of sales)
- Cleaning (33% of sales)
- Lifestyle (17% of sales)
- International (17% of sales)
The Household segment includes the Glad, Kingsford, Fresh Step and Renew Life brands.
The Cleaning segment includes the Clorox, Pine-Sol and Clorox Commercial Solutions businesses.
Lifestyle brands include Hidden Valley, Burt’s Bees and Brita.
Lastly, the International segment houses Clorox's brands that are sold all over the world. Clorox’s international reach extends to Latin America, Canada, Australia and a small collection of other nations.
Clorox enjoys high market share across its portfolio.
Source: 2017 Q1 Earnings presentation, page 3
Business conditions are broadly challenging but still supportive of growth. Headwinds facing the company include slowing economic growth in emerging markets and the strong U.S. dollar. Despite this, Clorox’s earnings per share increased 13% in fiscal 2016.
Management’s long-term strategy is to grow total sales by 3% to 5% per year. It will rely on product innovation and growth in new channels to meet this goal.
Growth prospects
One of the biggest growth catalysts for Clorox moving forward is expansion into new product categories. Clorox has diversified its portfolio in recent years through acquisitions designed to make progress in emerging areas.
For example, Clorox recently acquired Renew Life, a maker of probiotics, shakes and other nutritional products.
Source: 2017 Q1 Earnings presentation, page 19
It is easy to see why management has targeted the health and wellness category. The probiotics industry is expected to grow at a 15% compound annual rate going forward. This is because, according to Clorox, two-thirds of Americans suffer from some sort of intestinal health issue.
Another growth catalyst is innovation. Clorox is increasing its research and development spending to develop new products. For example, last year’s R&D spending rose 13% in the past two years. This spending has paid off.
Source: 2017 Q1 Earnings presentation, page 24
Innovation has enabled Clorox to release new products that meet changing consumer preferences.
One example is ‘connected’ Brita water filters, a Wi-Fi-enabled water filter that automatically reorders new filters when necessary. Another example is Glad trash bags with antimicrobial linings to help prevent the spread of germs.
These product innovations continue to provide the company with industry-leading market share rates in its core focus areas.
Separately, digital media and e-commerce are compelling growth drivers going forward.
Clorox has accelerated its investments in new media platforms. Over 40% of the company’s media spending is now allocated to digital media. This compares with 22% of media spending in fiscal 2013.
E-commerce is growing rapidly. Clorox’s e-commerce sales growth in fiscal 2016 was double the rate of growth three years earlier.
Competitive advantages & recession performance
Clorox’s main competitive advantage comes in terms of its strong brands. Approximately 80% of the company’s brands hold either the number one or number two market share position in their respective categories.
When consumers think of bleach, they think of Clorox. This helps insulate the company against generic competition taking market share. It also allows Clorox to charge premium prices for its products.
To keep brand retention high among consumers, Clorox invests significant resources in advertising. Its advertising spending over the past few years is as follows:
- 2016 advertising spend of $587 million
- 2015 advertising spend of $523 million
- 2014 advertising spend of $503 million
Another advantage of Clorox’s business model is that its products are used each day in millions of households, regardless of the overall economic climate. Everyone needs to clean their home, whether the economy is expanding or in recession.
This allows the company to remain profitable during recessions.
Clorox’s earnings per share through the Great Recession are shown below:
- 2007 EPS of $3.23
- 2008 EPS of $3.24
- 2009 EPS of $3.81
- 2010 EPS of $4.24
As you can see, Clorox increased earnings per share each year throughout the recession. This indicates its defensive, recession-resistant business model.
Valuation & expected total return
Clorox stock trades for a price-earnings ratio of 23. This is slightly below market averages. The S&P 500 Index holds a price-earnings ratio of 25.
However, Clorox is valued above its own average going back many years. Since 2000, the stock held an average price-earnings ratio of 18.
It seems Clorox stock is fairly valued given today’s low interest rate environment.
As a result, future expected returns will be made up of EPS growth.
A breakdown of potential shareholder returns going forward is as follows:
- 3% to 5% organic revenue growth
- 1% growth from acquisitions
- 1% margin expansion
- ~3% dividend yield
Based on this, shareholders can expect to earn 8% to 10% annualized returns going forward.
Final thoughts
Clorox is as steady as they come in the stock market. The company generates modest but reliable growth each year like clockwork.
Owning Clorox stock may not be the most exciting thing in the world, but there is something to be said for stability. Clorox has increased its dividend each year for more than three decades and the stock offers a solid 2.8% dividend yield.
The company’s stability and above-average dividend yield help it to rank in the top 33% of stocks with at least 25 years of steady or rising dividends using The 8 Rules of Dividend Investing.
There will always be a need for cleaning products and other household goods like trash bags, cat litter and charcoal. As such, Clorox should see steady demand moving forward, which will support its dividend and annual dividend growth for many years to come.
Disclosure: I am not long any of the stocks mentioned in this article.
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