(Published Dec. 27 by Bob Ciura)
Church & Dwight (CHD, Financial) may not register for investors interested in dividend growth stocks. It is in the consumer goods sector, with an $11 billion market cap.
It is dwarfed by the industry giants like Procter & Gamble (PG, Financial) and Colgate-Palmolive (CL, Financial), which have market caps of $226 billion and $59 billion.
But Church & Dwight is a worthwhile dividend stock in its own right. It ranks very highly using the 8 Rules of Dividend Investing.
Plus, it is a Dividend Achiever. You can see the entire list of all 273 Dividend Achievers here.
Church & Dwight has paid 463 consecutive dividends, a streak going back more than 115 years.
We will discuss why Church & Dwight stock could be a better dividend growth stock than its larger competitors.
Business overview
Church & Dwight’s history began when the company was founded in 1846 by Dr. A. Church and John Dwight.
The company’s first product was Arm & Hammer Baking Soda. Since then, it has expanded its product portfolio to include 10 flagship brands.
Source: Barclays Global Consumer Staples Conference, page 7
While Church & Dwight has more than 80 brands in its portfolio, its top 10 brands make up 80% of the company’s net sales and profit.
Church & Dwight is organized into three operating segments:
- Consumer Domestic (76% of sales)
- Consumer International (15% of sales)
- Specialty Products (9% of sales)
Church & Dwight generates the vast majority of its sales in the U.S., although this stands to change moving forward. Its percentage of international sales has risen ninefold since 2001.
The company has a diversified international footprint, spread across several emerging nations.
Source: Barclays Global Consumer Staples Conference, page 50
Thanks to the company’s strong brands and product innovation, business conditions were strong in 2016. Over the first nine months, sales and earnings per share rose 3% and 18%.
Going forward, acquisitions and new products should fuel continued growth.
Growth prospects
Church & Dwight’s impressive growth in recent years has been due to its aggressive acquisition activity.
Source: Barclays Global Consumer Staples Conference, page 10
The company will likely continue to strategically acquire smaller companies with high growth potential moving forward.
Church & Dwight looks for companies that have excellent brand strength, generate high margins and have asset-light business models.
In addition, two of Church & Dwight’s organic growth opportunities are in adult vitamins and dry shampoo. These categories are both growing at high rates due to shifting consumer preferences.
First, vitamin supplements more broadly are growing. According to Church & Dwight, approximately 68% of U.S. adults take a dietary supplement for vitamins.
More specifically, gummy vitamins are a huge growth category. Category-wide sales are up more than 20% so far in 2016. Church & Dwight is the number one gummy vitamin producer through its Vitafusion brand.
Consumers are rapidly moving from pills to gummies, which are much more pleasurable to consume.
Source: Barclays Global Consumer Staples Conference, page 20
The gummy vitamin market share tripled from 2012 to 2015.
Separately, Church & Dwight could see considerable growth in dry shampoo. Another emerging consumer trend is the preference for dry shampoo because of its lower chemical content and less harsh effect on hair.
Source: Barclays Global Consumer Staples Conference, page 22
The company’s Batiste dry shampoo brand is the top-seller in the U.S. and the U.K.
Thanks to Church & Dwight’s excellent earnings growth, it has been able to raise its dividend at high rates for many years.
Source: Barclays Global Consumer Staples Conference, page 86
This makes the stock very appealing for dividend growth investors.
Competitive advantages & recession performance
Church & Dwight’s main competitive advantage is its brand strength, which the company maintains through significant advertising.
Church & Dwight is the number 15 advertiser in the U.S. Its annual marketing spend comprises 12% to 13% of net sales.
In addition, the company allocates significant resources to research and development. Research and development is vital to developing differentiated products with new and distinctive features, providing the company with a competitive advantage.
- 2013 R&D expense of $61.8 million
- 2014 R&D expense of $59.8 million
- 2015 R&D expense of $64.7 million
The great thing about consumer products companies is that they enjoy recession-resistant products. Consumers always need to purchase household products, regardless of the economic climate.
Church & Dwight has a defensive business model. Annual sales take a 60-40 split between premium and value priced products.
Its EPS through the Great Recession are shown below:
- 2007 EPS of 62 cents
- 2008 EPS of 72 cents (16% increase)
- 2009 EPS of 87 cents (21% increase)
- 2010 EPS of 99 cents (14% increase)
Valuation & expected total returns
Church & Dwight stock trades for a price-earnings ratio of 26. This is right on par with the S&P 500 Index.
However, the stock seems expensive. Since 2000, Church & Dwight has traded for an average price-earnings ratio of 20.
This means the stock is currently 30% more expensive than its average going back over the past 16 years. As a result, investors might want to wait for a decline in the share price before buying.
That being said, investors can still earn strong returns moving forward. Even though the stock is fairly valued, it is growing at a high enough rate to justify its valuation multiple.
A reasonable breakdown of future returns could be as follows:
- 10% to 12% EPS growth
- 5% dividend yield
As a result, I expect Church & Dwight to generate approximately 11.5% to 13.5% annualized returns going forward.
Final thoughts
Church & Dwight may fly under the radar for many investors, but it has a strong business model with top brands in its core categories.
The company generates high margins and has proven to effectively invest in R&D and advertising to claim market share.
The potential for double-digit earnings growth could lead to double-digit dividend growth as well. While the stock has a below-average dividend yield now, it makes up for this with high dividend growth rates.
As a result, Church & Dwight is a long-term hold for dividend growth investors. It ranks highly using The 8 Rules of Dividend Investing. The only thing holding Church & Dwight back from being a strong buy is its relatively high price-earnings ratio. If the price declines, the company makes an excellent buy for long-term investors.
Disclosure: I am not long any of the stocks mentioned in this article.
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