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Why Clorox Might Not Have a Coronavirus-Inspired Second Act

By Will Healy - May 25, 2020 at 10:50AM

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Even a second wave of COVID-19 might not boost Clorox stock.

Clorox (CLX 1.32%) stock has enjoyed an unexpected surge thanks to the COVID-19 pandemic. As panic set in related to the contagion, consumers cleared stores of consumer staples, and stocks like Clorox benefited.

However, the spread of the virus has appeared to slow in recent days, and consumers have less trouble finding necessities. Moreover, even if a second wave of infections appears, the demand for cleaning products may not match the levels of the first wave. Due to these factors, Clorox has no obvious catalyst for another leg higher.

Clorox stock has long remained a steady performer

Clorox encompasses much more than bleach and the disinfecting wipes. The company also owns numerous other consumer products, such as Kingsford charcoal, Brita water filters, and Burt's Bees personal care products.

Close up of a wooden table being wiped down with a disinfecting wipe.

Image source: Getty Images

As a company, Clorox typically produces consistent sales and annual dividend increases but little else. However, the company has quietly served its stockholders well. Clorox stock has more than tripled in value over the last 10 years. Also, the dividend yield, which is slightly above 2.2%, is modestly higher than the S&P 500 average dividend return of approximately 2%. With its 42-year track record of annual payout hikes, it has brought its shareholders a steadily rising income stream for decades.

Nonetheless, thanks to the recent buying spree in consumer staples, sales rose by 15%, including a 32% increase for cleaning products. Also, diluted earnings per share (EPS) rose 31% from the same quarter last year.

The 30% year-to-date increase in the stock and the sudden popularity of its cleaning products have drawn attention in recent weeks. This helped Clorox stock avoid a significant downturn in February. Even though it has corrected recently, Clorox stock trades within 7% of its all-time high.

CLX Chart

CLX data by YCharts

Clorox lacks obvious additional catalysts

Still, the immediate future appears to bode poorly for Clorox stock. For one, new infection rates have begun to slow. This has occurred even as segments of the economy have reopened.

News from China and other countries indicates that the potential remains for a second wave of the virus. Still, shoppers stocked up on consumer goods during the original threat. Even if another run on consumer products occurs, it will probably not match the level of buying stores saw in the first wave.

Moreover, the CDC determined that COVID-19 is less likely to spread from surfaces than it had initially feared. This fact alone may dampen the demand for disinfecting wipes.

Furthermore, current valuations will offer little help to Clorox bulls for now. The forward P/E ratio has risen to 28.3, well above the five-year average of 23.8.

Also, for all of the focus on increased sales, analysts expect only single-digit earnings increases, both in fiscal 2020 and in the years to come. The company's projections back this up as they forecast that diluted EPS will move between 6% and 9% higher in the current fiscal year.

This takes the price-to-earnings-to-growth (PEG) ratio to 5.0. To put that multiple into perspective, some consider a PEG ratio above one "expensive."

Clorox stock looks like a hold

This is not to say long-term investors should sell Clorox stock. Like other consumer staples stocks, the company sells products needed in the daily lives of the populace. Though these products have numerous competitors, analysts still expect revenue and profits to rise.

Admittedly, at a dividend payout ratio of 64.7%, the percentage of profits going to the dividend could concern some investors. However, walking away from a 42-year streak of payout hikes could rattle investors. Both Dividend Aristocrat funds and many income-oriented investors might dump the stock en masse if such an event occurred. Since Clorox can continue the payout hikes, the company will probably proceed with annual dividend increases for the foreseeable future.

However, Clorox stock appears to have run out of new catalysts. Even if a second wave of COVID-19 sweeps the world, the reduced need for disinfecting wipes makes it less likely that Clorox would benefit.

Long-term bulls will continue to profit from Clorox. However, given the probability of lower demand and the stock's elevated valuation, investors should not buy at this time.

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