A dividend cut isn't a happy experience for shareholders of any company, but it would be a downright shock to owners of Clorox (NYSE:CLX). The Dividend Aristocrat, after all, boasts an unbroken 40-year streak of annual raises. It would likely take a massive market disruption to force the company to abandon that promise.

But while investors can be reasonably confident that Clorox's dividend will continue rising, the pace of those increases is a different beast. Below, we'll look at the prospects for this dividend to grow at market-beating rates in the years ahead.

A jar full of coins marked "dividends".

Image source: Getty Images.

Operating trends

Clorox's ability to fund a strong dividend starts with achieving a healthy sales growth pace. There's good news on this score because the consumer products giant's business is growing at a solid clip today.

Revenue is up 5% over the most recent nine-month period, to match the gains that Clorox logged in each of the past two fiscal years. Many peers, in contrast, are struggling to improve sales at all as the consumer products industry chugs along at near zero growth. Kimberly-Clark (NYSE:KMB), for example, recently lowered its expansion outlook to below 2% in 2017. Procter & Gamble is aiming to grow at the same 2% rate for its current fiscal year.

Clorox product innovations planned for 2017.

Image source: Clorox investor presentation.

Clorox is gaining market share today mainly because of a string of successful product innovations that keep it ahead of customer demands. Clorox brand disinfecting wipes are a hit with consumers, and soaring demand there helped push volume higher by 13% in its core cleaning division last quarter. The company is banking on more gains ahead powered by fresh releases like its "scentiva" platform, which aims to turn cleaning into a more pleasant scent experience.

Earnings and cash

Clorox's dividend is well covered by both earnings and cash flow. The payout commitment amounted to 61% of profit last year, or right in line with peers. Since that payout ratio is well above 50%, though, Clorox has been a bit conservative with its latest hikes. Its 2017 dividend boost of 5% significantly trailed the prior year's 8% earnings improvement. 

CLX Free Cash Flow (TTM) Chart

CLX Free Cash Flow (TTM) data by YCharts.

Management targets generating free cash flow of between 10% and 12% of sales and it has hit that goal in each of the last four fiscal years. Clorox's first priority for those excess funds is in reinvesting in the business. That includes increased advertising spending in addition to more aggressive outlays like mergers and acquisitions. After that goal is met, Clorox routinely has plenty of cash leftover to fund direct shareholder returns including dividends and stock buybacks. Last year it generated $600 million of free cash flow, compared to the $398 million it committed as dividend payments.

Dividend outlook

Clorox's long-term targets call for sales growth of between 3% and 5%. Earnings should increase at a faster clip thanks to cost-cuts and the company's dominant market share position across its key competitive categories. Thus, investors can reasonably expect Clorox's dividend to rise at a pace that's a bit slower than earnings growth but faster than its sales growth pace.

Of course, a large, expensive acquisition would change that equation, and so would a sharp economic downturn. Yet the most likely worst-case scenario for income investors involves a period of relatively small dividend increases. With its rock-solid finances and steady market share position, Clorox has all of the right ingredients to fund a safely growing dividend in 2018 and beyond.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.