Clorox (CLX -0.19%) is a company I had watched from a distance for many years, never pulling the trigger because the dividend yield was a bit low for my taste. However, I've built up a sizable portfolio of high-yield, slow-dividend-growth names, and I'm starting to add some lower-yielding fare that offers the potential for higher rates of long-term dividend growth.
I think Clorox offers just that, and the recent sell-off got me into the stock. I think it's still worth a close look for dividend-growth investors.
The core
Clorox is named after its most famous product, Clorox bleach. But that's just one small piece of the company's overall business. For example, it has extended the Clorox name into the cleaning products area, where it owns a host of other brands as well. But it also owns Kingsford (charcoal), Glad (plastic bags), Fresh Step (kitty litter), Brita (water filters), Burt's Bees (lip balm), and many other brands you have probably heard of as well as some smaller names you likely don't know.
Image source: Getty Images.
There are a few takeaways from this. First, Clorox is much more than just bleach. Second, it has a very diverse and eclectic catalog of products to help support long-term growth. And third, it owns a significant number of leading brands. Many of those brands, meanwhile, face little material competition outside of the generic in-store brand (bleach is the prime example of this). It's a pretty strong company from this perspective, which helps explain why it has been able to increase its dividend annually for 45 consecutive years, making it a Dividend Aristocrat with a compound annual dividend growth rate of roughly 7% over the past decade. While that's not massive growth, it's way more impressive than the low single-digit growth I get from a boring utility stock like Southern Company. So, overall, Clorox helps to bring up the average dividend growth of my portfolio.
I'm confident that Clorox can continue to work its brand magic over the long term. But right now things aren't going so well, which is why the shares are down nearly 40% from their mid-2020 peak. That, however, needs a little more discussion.
A shock to the system
Well-run companies don't go on sale very often, and when they do, it is usually for a reason. In the case of Clorox, the reason is that its fiscal second-quarter 2022 results were downright terrible. Sales fell 8% and earnings declined 67%, largely thanks to a massive 12.4 percentage point drop in the company's gross profit margin. The quarterly update was so bad that Clorox stock fell 13% on the news. There's no easy fix here.
That said, the big sales problem was in the company's cleaning business. That area saw unusual strength during the pandemic in 2020 as consumers tried to disinfect everything to protect themselves from the coronavirus. As the fear has waned, so, too, has demand. That's not shocking at all and explains the health and wellness division's 21% year-over-year sales decline in the quarter. That's the division in which cleaning products are housed. Sales in the rest of the company's divisions were flat to slightly higher. In other words, this doesn't look like a systemic problem but one that's related to pandemic disruptions.
Meanwhile, inflation is jacking up the company's costs. That's happening throughout the world, so it isn't unique to Clorox. And, historically, consumer staples companies eventually pass on such increases via price hikes. That's in process at Clorox but will take time to work through the system. Some of the added costs the company is facing, meanwhile, stem from contract manufacturing deals that it signed when demand for cleaning products was high. Now that demand has fallen, it will simply let those contracts lapse. So costs are an issue, but perhaps not as material as they first seem, and more importantly, Clorox has a plan to deal with the headwind.
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All in, it is tough right now for Clorox and will likely remain tough for another four to six quarters -- but long-term investors should think in decades, not quarters. Plus, the core of the business seems just as solid today as it did before the pandemic. Yet the stock drop has pushed the dividend yield toward the high end of the company's historical yield range, suggesting it is historically cheap.
Still attractive
To be fair, I bought Clorox when it was a touch cheaper than it is today. But my long-term thesis isn't materially altered by that fact. Clorox is a historically well-run company that has rewarded investors with solid dividend growth over time. It is going through some material problems today, but they are likely to be temporary. And, thus, for long-term dividend investors, this is probably a good opportunity to buy a great company on the cheap. Note that I'm happily letting my dividend reinvest, so I am literally still buying it today.
