Photo: Mike Mozart, Flickr.
It's always smart to consider dividend-paying stocks for your portfolio, as dividends can be such powerful wealth boosters. (Really -- they're not just for retirees!) A great place to find some solid contenders is among Dividend Aristocrats, companies that have raised their dividend payouts each year for at least the past 25 years. Let's get to know one Dividend Aristocrat, The Clorox Co. (CLX -0.69%) (37 consecutive years of dividend increases!), and see whether this is a good time to invest in some shares.
Nuts and bolts
It's unlikely that you haven't heard of Clorox, as it's been around for 101 years, since 1913. It's best known for its bleach, but it also encompasses lots of other brands and products, such as Formula 409, Liquid-Plumr, Pine-Sol, S.O.S, Tilex, Green Works, Glad, Fresh Step, Scoop Away, Ever Clean, Kingsford, Match Light, Hidden Valley, KC Masterpiece, Soy Vay, Brita, and even Burt's Bees, which it bought in 2007.
A nice aspect of Clorox is the defensiveness of many of its offerings. In an economic downturn you might grill fewer steaks and therefore need fewer charcoal briquets, but you probably won't cut back on the bleach you need for your laundry, or drain cleaner when your pipes clog, or cat litter.
Source: Clorox.
Why Clorox is appealing
Why else would someone want to own Clorox? Well, let's start with its dividend, which yields a robust 3.4%. It has upped that payout by an annual average of 11% over the past decade and 8% over the past five years. Its payout ratio of 67% shows it distributing two-thirds of earnings to shareholders, which leaves room for further dividend increases.
Its brand portfolio is compelling, too, with brands that rank first or second in market share in their respective categories making up 80% of it. In its Roadmap to 2020 presentation for investors (link opens a PDF file), the company listed a host of competitive advantages, such as having the same customer set to market its offerings to, enjoying supply chain scale that gives it buying power and optimized transportation, and having a lower cost of sales and administration than its peers -- recently 14% of sales and administration, versus 21% for peers. With a market capitalization of $12.2 billion and annual revenue topping $5.5 billion, Clorox is about three times the size of its biggest branded competitor.
Then there's Clorox's international operations, which generate about 21% of revenue, two-thirds of that from emerging markets. International exposure offers diversification, decreasing the company's dependence on the U.S. economy, and emerging markets are able to grow much more briskly than our developed economy.
Finally, there's innovation. One way Clorox is aiming to juice its sales is through new offerings, such as Burt's Bees lip crayons, scented Clorox Fraganzia bleach, and the CareConcept line of cleaning and personal care products for in-home caregivers. It even offers a MyStain app to dispense cleaning advice.
Source: Clorox.
Why you might hold off on Clorox
Clorox isn't perfect, though. For one thing, its revenue and earnings may be hefty, but they're not growing very briskly. Indeed, they each averaged annual gains of less than 1% over the past five years. Earnings per share averaged 2% growth, in part because the company increased its efficiency and reduced its share count via stock repurchases. Those are admirable achievements, but it's always best to see a company's growth coming from its top line.
Market share, meanwhile, has been shrinking in some categories -- such as cat litter. And along with its last earnings report, management reiterated previous guidance that it expects revenue to be roughly flat in the coming year.
Clorox is carrying considerable debt, too, but its long-term debt is dropping and its interest payments are not threatened. In addition, the company has a new CEO, Benno Dorer, taking the helm in November, and while that might be a good thing, we don't know that yet. For now, the management change means uncertainty. Dorer plans to focus on Clorox's products that offer the highest profitability. The company is already pulling out of Venezuela, where performance was hampered by government regulations and economic instability.
Is it time to buy?
Clorox is good at generating cash and at issuing payouts to shareholders, but it's not the best investment candidate that does that. Right now, the company is struggling, and despite that, its valuation seems rather high. The company's current and forward-looking P/E ratios, of 23 and 21, respectively, are both above its five-year average of 19. And its price-to-sales ratio of 2.3 tops the S&P's 1.8.
Go ahead and keep an eye on Clorox, but it doesn't seem like the best time to buy this Dividend Aristocrat.
