Is This Dividend Aristocrat Suddenly a Growth Stock?

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines and earnings reports from Wall Street. They've got a great investing lesson from Clorox (CLX -0.69%), they go through the results of and discuss a streaming video business, the restaurant space sees a new acquisition at a surprising premium and much more.

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This video was recorded on November 2, 2020.

Chris Hill: It's Monday, November 2nd. Welcome to MarketFoolery. I'm Chris Hill, with me today, Mr. Jason Moser. Happy Monday!

Jason Moser: Happy November! Huh! How about that? [laughs] We are moving right on.

Hill: We're just plugging right along. We've got entertainment earnings; we've got some restaurant news. Quick programming note: we are off tomorrow. You might have heard it's Election Day here in the United States of America, so we are off tomorrow, but we're going to be back on Wednesday, so don't worry about that.

Let's start with Clorox. First quarter profits doubled year-over-year. It was the strongest revenue growth in more than 20 years for Clorox, and they raised [laughs] guidance for the full fiscal year, they're starting the fiscal year off with a bang.

Moser: Hey! It is a very good time to be Clorox. I mean, that did make sense given the state of things today. But yeah, they had a wonderful year. The headline numbers look really good from this release. I mean, 27% increase in sales, and that was really all organic. And that, for a company like this, is really impressive. Earnings growth over 100%, and when you think about what's going on, again, it makes perfect sense. But you know, one of the benefits from Clorox is, it's obviously a very familiar name, the Clorox name, but it holds such a vast product lineup that I think there are a lot of names in there that people might not even really associate with Clorox the company, but more than 80% of their product lineup holds either the No. 1 or No. 2 position in their markets. And that alone is, I think, something to really think about, particularly, you know, in this day-and-age where people are really focused more than ever on cleanliness.

And so, then you look at this rich history of this company that, I mean, it's not the type of company that normally is going to light the world on fire with that type of sales growth, but when you look at its main business segments, the key business segments, you can see why these numbers were so good. The health and wellness segment, which is cleaning and professional products and vitamins and minerals, saw 28% sales increase in that segment. Household, which is things like bags and wraps and grilling and, hey! cat litter -- Man! That's obviously something that's going to be in high demand these days as well -- 39% sales increase in that segment. And then the lifestyle segment, which includes things like food, water filtration, personal care, 17% sales increase there. And so, across the board, I guess my point is that it was really nothing less than just success across all segments, which led to these numbers. And given that it's a global business, they are really able to help the world right now in addressing what is a very difficult time.

Hill: They are, and it's just, you know, we've talked recently about the "boring businesses" just like this, [laughs] you know, for all of the rise we've seen in workplace collaboration software, Software-as-a-Service, cloud computing, all of that stuff, you also got to throw in the Cloroxs and the Tupperwares of the world for being very straightforward. And you know, I said early in the pandemic, it's really hard for me to imagine that the next 10 years for this business and this stock isn't going to be better than the last 10.

Moser: Yeah, I think you're right. I'm glad you mentioned that, because it is important in this day-and-age, where the discussion in the investing world always just centers around SaaS and cloud and edge computing and 5G and all the stuff. I mean, there really are just those simple businesses out there that just do something pretty easy to understand and they just do it really well. Obviously, I talk ad nauseam [laughs] about McCormick on the show. And you know, that's partly by design, it is just one of those simple to understand businesses that it's not going to light the world on fire, but over longer stretches of time, you see the sense in owning the stock.

And Clorox, I think, is in that same boat. It is a dividend aristocrat. It's a stock that, on any given year you're not going to be looking at and thinking, wow! Man! my portfolio really lit up this year thanks to Clorox. But if you look out over longer stretches of time, and I mean, I'll look at just over the last decade, Clorox as a company, that back in the day when we had that real-money Rising Stars initiative here at The Fool, it's a company I added to the real-money portfolio that I was running back in 2011, and that was the general idea, it was hey, listen, this is just something you're going to put in your portfolio and kind of tuck away, because it's always going to remain relevant. They have some challenges I think in competition, I mean, they do have to worry about private label brands.

Interestingly enough, the flipside, in times like these, I think this is where that private label brand threat is mitigated a little bit. I know customers/consumers may be a little bit more cost-sensitive these days, but I also think that when they're really looking to make sure that something is going to get the job done, they do start relying a little bit more on the brands that they know, and I think that plays into one of Clorox's strengths. I do think they're always going to have to worry about that private label brand threat, and they also have a [laughs] lot of success hinged to how Walmart performs. I mean, Walmart represents about 25% of Clorox's overall sales, and so they do depend on Walmart as a partner.

But again, I think that this is a long track record this company has developed, and as a dividend aristocrat, obviously, the dividend remains a priority. I don't think that will ever change. I think this is a business that's set up to succeed for long periods of time. And again, it does something that's really pretty simple, and there's a great investing lesson there.

Hill: Proof today that not everyone is succeeding in the world of streaming video, third quarter revenue for AMC Networks (AMCX -4.41%) fell 9%. They say they are expecting to have around 5 million paid subscribers for their video streaming service. The stock is up about 5% today, but you just back it out, for 2020, it's still down more than 40%. And I don't know, this is one of those businesses that I, sort of, look at and I wonder, are they going to be around in three years as a stand-alone public company? Because I'm not confident about that.

Moser: Yeah, I'm not confident about that either. I wonder about them myself. It's not a bad business per se, I mean, it does something well in the content side, but I think this really goes to show how extremely important distribution is in today's media landscape. I mean, having the quality content, which is really what AMC is known for, first and foremost, is content, I mean, just having the content is not going to get it done on its own. The content is not king, despite what some may want to tell you. And if you're going to run with that content is king line, you need to figure out where distribution fits in there, because distribution is clearly equally, if not more important, which is why we've seen the levels of success with companies like Netflix and Amazon Prime and Hulu, and, I mean, wow! We just saw Peacock there recently, right? That's 22 million subscribers that just jumped on that app in no time.

And then you look at AMC, and you know, they expect 5 million to 5.5 million paid subs by the end of 2020 for its entire portfolio of streaming services. And, oh, yeah. Hey, Chris, they do have a bundle, so that's pretty cool. And it's a really clever name, AMC+, I mean, where would they have come up with that? [laughs]

Hill: I like to think that at least when they were batting around the name, someone in the room said, OK, if we can't come up with anything else, we'll go with -- can we come up with, like, this is the baseline, let's try and do better than this.

Moser: It feels like there's got to be a voice in the room that says, is that really all you got? So I don't know, maybe they try to rebrand that at some point. I mean, they do have some interesting brands. And again, I like some of the content you're getting out from this company. I worry that they're really levered to The Walking Dead still, and that, you know, seems like it's going to be a problem. I mean, you have to look at how this company makes its money and then try to figure out how attractive of an investment idea it would be for you. I mean, if you look at its stretch as a publicly traded company, it's not been a very good investment, it had a moment there, but all in all, if you've been holding on to these shares since they went public, you're not a very happy camper right now.

But if you look at the way they make their money, this is where it gets a little bit troublesome. I mean, it's essentially distribution and advertising, right? And so, it's subscriptions, it's the advertising sales. And if you look at the way that breaks down the distribution, which accounts for about 68% of consolidated revenues, the other 32% is advertising; obviously, the advertising market has had a difficult time this year earlier in the year, and it's recovering a little bit. But when you talk about subscription, you know, the distribution revenue. That's subscription, and that's affiliations, that's a bit of a more difficult road ahead I think, because I don't know that a company like this necessarily is going to command a whole heck of a lot of pricing power.

And certainly, it seems by the numbers, I mean, revenue for the quarter was down 9%. I just don't know how reasonable it is to believe that this is a company that's going to have some magic bullet that turns everything around here. I mean, they really have, I think, benefited from some of their content, whether it's Breaking Bad or Better Call Saul or Walking Dead. I mean, clearly, that keeps them at the top of the conversation. But again, you get back down to the distribution side of it and you compare the audience sizes, you kind of wonder, if at some point maybe -- you know, we saw Hulu and Disney bring FX into their universe by virtue of that Fox acquisition, I mean, you kind of wonder at some point if you don't see AMC being rolled into another bigger family at some point, like you questioned there, I think it's more likely than not.

Hill: The debt is a problem though. I mean, if you're looking at, sort of, AMC Networks, which for those unfamiliar, obviously AMC is the flagship network, they also have Sundance and IFC, a couple others as well. But AMC is really sort of the jewel in the crown. If you're just looking at the content and the equity that you have there, the cash that they have on hand, I mean, the market cap is just over $1 billion and I think they have somewhere in the neighborhood of $800 million cash-on-hand, but the debt outweighs that. And I think that's the thing that someone would have to, sort of, figure out, and maybe it's something where they spend the next year trying to clean up their balance sheet a little bit to prepare for an acquisition, so they get some sort of a bump, but the debt is a problem.

Moser: Yeah. And I don't think that problem ever goes away, because when you're in this content business, you constantly have to pay for content; even Netflix isn't exempt from that. I mean, Netflix has just some amazing content obligations, but they also have a pretty amazingly large subscriber base as well. And it's not reasonable to think that AMC will ever get to that point. So, then really it's going to be more about them producing great content and figuring out ways to license it out. I don't think they're going to be any type of a mainstream subscriber service; and so that's going to limit what they can do on that subscription side.

And so, then it's really going to boil down to advertising, which is, it can be lumpy, and you know, a lot of people trying to figure out ways to get their content without having to deal with ads in the first place. So, yeah, fortunately for them for now, they have +$3 billion in debt on the balance sheet, they have the operating income to cover their obligations with no problem whatsoever, but if they want to keep on churning out good content, that's going to require some resources, and that means they're going to have to raise some more money in some way, shape, or form. And so, yeah, I don't suspect that problem ever goes away.

Hill: Last Monday on the show we talked about a New York Times report that Inspire Brands was planning to buy Dunkin' Brands (DNKN) for $8.8 billion. And one week later, we've officially got a deal. Shares of Dunkin' up this morning, just below the buyout price of $106.50/share. I had said a week ago that the premium that Inspire Brands is paying for Dunkin' was surprising to me, because Inspire Brands had built its portfolio of restaurants by buying them at a little bit of a discount, buying them at times when they were struggling, this is a 20% premium to where shares of Dunkin' were when the story was first reported.

But you know, I'm starting to warm up to this deal for Inspire, in part because Dunkin', they're not Starbucks. And by that, [laughs] I mean, Starbucks, for a very long time, was trying to be the third place. You've got your home, your work, and we want to be the third place where you hang out. Dunkin' has never built its business on come hang out here, it's like, no, come get your coffee and donuts and leave. And that's a business very much of this time.

Moser: Yeah, I think you're right. I actually don't know that that really changes. I think that -- I mean, you're certainly looking at Starbucks reassessing their footprint because I think they recognize that the priority on the third place, it doesn't hold the same sway as it used to. And you're right, Dunkin' never really was about that. And you make a good point there in regard to the different brands under Inspire's umbrella, because you've got Arby's, you've got Buffalo Wild Wings, you've got Rusty Taco -- which was part of the B. Wild deal -- you've got Jimmy John's.

I mean, all of these, they're not bad brands by any means, but you're right, they picked up some brands that were in some challenging spots. I mean, they were able to get a pretty good deal at the time. And, you know, Dunkin', I think, is a business that's been performing really well. And so, when you look at this actual deal, No. 1, it's an all-cash deal, so that's really nice. That price of $106.50; that's about 40X trailing earnings. Which, you know, listen, I understand that Chipotle is trading for 120X, 130X earnings, just they're slinging burritos. That's a bit much, so that's not reasonable to expect from something like this. I think you're getting a coffee in a donut shop here for 40X trailing earnings, that's a pretty nice premium I think for what's a pretty darn good business.

A 100% franchise model, so it's easy to get your stores up-and-running. And ultimately, with Inspire, this is going to give them -- man! I tell you, this is a pretty [laughs] amazing company when you look at everything they have going for them. After this deal, this is going to give Inspire Brands $26 billion in systemwide sales, just under 32,000 restaurants in +60 countries. They're going to have more than 25 million loyalty members and about 14 million of those are coming from Dunkin', from this acquisition. So, they're going to have a really impressive presence in a market where we talk about scale being such a phenomenal competitive advantage all the time. I mean, this is going to be a really impressive business. And frankly, I kind of feel like we ought to start having the discussion of when do we feel like Inspire might try [laughs] to go public, because I'd be kind of interested in learning more about that business given how strong it's going to be after this acquisition.

Hill: Yeah, this is the biggest deal in the restaurant industry in six years. And Inspire has really established itself. And I think this is, because of the size of this deal, because of the brands involved, I think this is the deal that is making a lot of people, including you and me, take a much closer look at Inspire Brands, which is private. And as you said, it would be interesting to see -- I mean, I was actually thinking about it from the standpoint of what you typically see in this situation, which is, you know, umbrella companies take a series of brands private and then look to spin them out in a couple of years. So, to me, it wouldn't shock me, it would almost be more surprising if Inspire went public, it would be a bolder move on their part, and selfishly, it would [laughs] just be more interesting.

I think, if they spinout Dunkin' in a few years, it's probably because they've had some success with expansion in the Western half of the United States, they've probably also added some debt in there as well.

Moser: Yeah, you're right, that is something that we normally see, they would look to spin these concepts out and make some money, and kind of [laughs] leave future shareholders holding the bag of a restaurant company saddled with a lot of debt. You know, I wonder -- and I'm not entirely convinced that actually is what's going to happen, I mean, it certainly could, but if you read through the release from Inspire Brands, Paul Brown, the CEO of Inspire Brands, he wrote a letter to their team members just regarding this deal and kind of what the company is about and what their goals are. It just really seems to me like their focus is more on building out this business to be as big and as awesome as they think it can be. So, I don't know, I mean, it could go either way there, but it certainly seems like the language from CEO Paul Brown is that they're a little bit more long-term focused here. So, yeah, I guess we'll have to wait and see.

Hill: And we can't leave before mentioning Friendly's. Speaking of beloved restaurants, Friendly's declared bankruptcy once again. I think this is the third time in the past decade [laughs] that Friendly's has declared bankruptcy. For those unfamiliar -- do we call it fast-casual, I don't know, it was more of a sit-down restaurant and ice cream shop, started in New England, that's really the bulk of the footprint for Friendly's restaurants. I know they have a couple in Florida and South Carolina, but this is really a New England and Mid-Atlantic restaurant chain. You know, if history is any guide, they're going to come out the other side of this.

Moser: Oh, yeah. I mean, it looks like this is something that was driven by the pandemic and the impact it's had on the restaurant industry. I don't think Friendly's was really killing it before anyway. But it does have a rich history and a small footprint, somewhere in the neighborhood of 130 restaurants. I think they're all going to actually stay open. I mean, they're selling these assets off, but the restaurant should remain open. We used to have one right here by our house and we would go every couple of months or so. The girls enjoyed it. And yeah, you always knew you could just get, like, a really terrific ice cream dessert after dinner. [laughs] And it was just kind of like a -- I don't know, similar to like a Shoney's experience from growing up or something like that.

But it is a very difficult stretch here for restaurants. And certainly, Friendly's is not the only one here. I think I was reading about, what was it, Ruby Tuesday, which you know, I get that. Chuck E. Cheese, I can't believe that they didn't filed for bankruptcy earlier; that place is just so gross on so many levels. But yeah, Friendly's was always just, it was a nice experience. Very, very family oriented, good memories, you can still buy their ice cream in the grocery store, thankfully; I think that was sold off maybe to, I don't know, Dean Foods or something like that ...

Hill: Dean Foods bought it, yeah.

Moser: Do you ever buy their ice cream still in the store?

Hill: Absolutely. [laughs]

Moser: Yeah. Man! I tell you, that's -- I don't know about you, but I'm a bit more of a fruit-flavored ice cream guy than a chocolate ice cream guy, I just liked the fruity flavors a little bit more. They have a black raspberry ice cream that is just out of this world, and anytime I ever see it, man! It's very difficult to pass up, it is so, so good. [laughs]

Hill: Throw some chocolate chips in that and then I'll give it a shot.

Moser: Hey! Now you're talking, I think I can get on board with that.

Hill: Jason Moser, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we are off for the election, we will see you on Wednesday.