Prior to the pandemic, Clorox (CLX -1.39%) had been struggling with weak sales of its household products -- including bags, wraps, grilling products, cat litter, and digestive health products -- and its international sales had been declining. However, the pandemic sparked fresh demand for its cleaning products, especially in the U.S., and easily offset those weaknesses.
That shift turned the slow-growth consumer staples stock into one of the top defensive plays against COVID-19, and sparked its year-to-date rally of over 40%. Clorox's stock might still have room to run in this jittery market, but investors seeking a more balanced consumer staples investment for a post-pandemic world should stick with its larger peer Procter & Gamble (PG 0.13%) instead.
P&G is better poised for a post-pandemic slowdown
Clorox generated 41% of its revenue from its health and wellness segment in fiscal 2020, which ended in late June. This business includes its cleaning, professional products, vitamins, and health supplements.
It generated another 27% of its revenue from its household segment, which includes its bags and wraps, grilling products, and cat litter; 17% from its lifestyle segment, which sells food, water filtration products, and personal care products; and the remaining 15% from its international business.
Clorox's revenue rose across all four segments in 2020, but the household unit only generated 1% sales growth, even after pandemic-induced purchases boosted its sales by double digits in the fourth quarter. But this unit could struggle again after the pandemic ends, and it might not offset that slowdown with sales of its cleaning products -- which will likely face a post-pandemic slowdown and tough year-over-year comparisons in 2021.
P&G's business is better diversified across five sectors: fabric and home care products (33% of its revenue in fiscal 2020, which also ended in late June), baby, feminine, and family care products (26%), beauty products (19%), healthcare products (13%), and grooming products (9%). It also generated over half its revenue outside of North America, which greatly reduced its exposure to the volatile COVID-19 shopping trends in the U.S.
Prior to the pandemic, P&G's weakest link was its grooming unit, which struggled against competitors like Unilever. That business didn't improve throughout the pandemic, but the crisis sparked stronger sales of its fabric and home care products.
P&G's growth has traditionally been more balanced than Clorox's, and it should face gentler year-over-year comparisons after the crisis ends. Its weakest business is much less important than Clorox's household segment, and its core business isn't too dependent on elevated demand for cleaning products.
A brighter outlook with a lower valuation
Clorox expects its fiscal 2021 sales to be "flat to up low-single-digits" as the robust demand for its cleaning products continues throughout the first half of the year. But in the second half of the year, it expects its sales to decline after lapping the initial impact of COVID-19.
On the bottom line, it expects its earnings to be "down mid-single-digits to up mid-single-digits" due to more aggressive brand-building investments and the expansion of its production capacity with third-party manufacturers.
P&G expects its organic sales to rise 2%-4% in fiscal 2021, and for its core earnings to grow 3%-7%. It expects its core brands to continue growing their shares in higher-growth markets. P&G also expects stronger organic sales growth in the first half of 2021, followed by "moderate" growth in the second half -- but its outlook seems slightly brighter than Clorox's.
Analysts currently expect Clorox's revenue and earnings to rise 3% and 4%, respectively, this year -- which are both near the high end of the company's own expectations. They expect P&G's revenue and earnings to grow 3% and 5%, respectively, which matches the company's own forecasts.
However, Clorox currently trades at 32 times forward earnings, which is significantly higher than P&G's forward P/E ratio of 26. Clorox's forward dividend yield of 2% is also lower than P&G's yield of 2.3%.
With 64 straight years of annual dividend hikes, P&G is a Dividend Aristocrat of the S&P 500 --a member of the index that has raised its payout for at least 25 straight years. Clorox has raised its payout annually for nearly 20 years.
The bottom line
Clorox outperformed P&G this year, but past performance never guarantees future gains. I recommended Clorox as a solid COVID-19 stock back in February, but its old problems could surface again after the pandemic ends. When that happens, P&G's better-diversified portfolio, more balanced outlook, higher dividend, and lower valuation will all make it a more appealing consumer staples stock than Clorox.