Peter Lynch always said "invest in what you know." Lynch believed that everyday investors could match the performance of professional money managers by simply investing in products that they knew. There's a very good chance that you know Pine-Sol, Formula 409, Kingsford charcoal, Hidden Valley dressing, and Burt's Bees. These are stable brands that sell well despite the broader economy.
What many investors don't know is that The Clorox Co. (NYSE:CLX) owns all of these brands and more. It's much more than just a bleach company. The company is internally diversified, with four segments that each make up 30% or less of its total revenue.
Quite a diversified company
Cleaning is Clorox' top segment, with its other segments being household, lifestyle, and international. Other major Clorox cleaning products include Liquid-Plumr, S.O.S, and GreenWorks. Beyond cleaning brands, Clorox also makes and sells charcoal, plastic bags, charcoal, cat litter, and water filters. As mentioned, these brands are fairly insulated from the broader economy, hence Clorox's 0.45 beta.
Toward the end of last year, Clorox introduced its 2020 strategy. The idea is to promote Clorox's long-term profitability. This new strategy is expected to yield long-term sales growth of between 3%-5%, and expand its earnings before interest and taxes margin by 25-50 basis points. To achieve those goals, Clorox is looking to expand geographically. This is a big positive, as the company currently gets around 80% of its revenue from the U.S.
Dividends and share buybacks should entice investors
While the growth opportunities are appealing, investors shouldn't overlook Clorox as a total yield play. What should get investors really excited about the 2020 strategy is that it should boost free cash flow to between 10%-12% of sales, versus 10% for fiscal 2013.
Clorox's dividend payments are robust. It has upped its quarterly dividend payment for 37 consecutive quarters. In just the last three years, it has increased its dividend payment by 42%. Clorox's dividend yield is also very enticing. Its dividend yield is 3.2%, which is well above its peer-average dividend yield of 2.5%. Also, the company has managed to repurchase nearly 40% of its outstanding shares over the last decade.
What's the competition look like?
The cleaning and consumer goods space is no stranger to competition, with other major players including Church & Dwight (NYSE:CHD) and Colgate-Palmolive (NYSE:CL). However, Clorox offers investors the top dividend yield in the group and is the cheapest company in the group.
Clorox's dividend yield is upwards of 3.2%, while C&D only yields 1.7% and Colgate yields 2.1%. Meanwhile, Clorox trades at 20 times earnings; C&D trades at 24 times earnings and Colgate trades at 26 times earnings. Clorox's return on invested capital is a very impressive 23%, whereas the peer average is closer to 15%.
Although both of Clorox's major competitors are a bit expensive, they both have solid recession-proof business models. C&D offers one of the most resilient products. Its Arm & Hammer product sales rose by double-digits during the economic downturn, most notably in 2009 . Back in November, C&D announced fiscal third-quarter results that showed earnings up 15% year-over-year, driven by its Arm & Hammer and Trojan brands. If C&D posts gross margin expansion for its latest quarter, the fiscal fourth quarter, it will be the sixth straight quarter of expansion.
As for Colgate, it offers the various Speed Stick, Palmolive, Colgate, and Hill's Pet Nutrition brands, among others. Analysts expect the company to post 6% growth in earnings year-over-year for its most recent quarter; results are due out next week. The real beauty for Colgate is that it owns nearly half of the global market share for toothpaste.
Clorox is one of the cheapest companies in the cleaning and consumer goods space while it also offers investors a fairly solid dividend yield. The company operates in a variety of key consumer products areas, from trash bags to salad dressing. Even as the economy strengthens, the products that Clorox sells should continue to perform nicely. It also has a beta of only 0.5, which suggests it's relatively insulated from the broader market.
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Editor's note: A previous version of this article listed Colgate-Palmolive's ticker as NYSE: PL. The Fool regrets the error.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.