Cleaning products veteran Clorox (CLX 1.24%) has been a tricky investment recently. The stock soared to an all-time high of $240 per share in the early days of the COVID-19 pandemic, but the gains didn't last. Clorox's stock has been sliding since the summer of 2020 and is now trading 35% below the record highs.
Is this a great time to pick up Clorox shares on the cheap? Let's take a look.
Image source: Getty Images.
A long history of solid returns
Clorox has been a sleepy value stock for decades. Annual revenues have increased by 19% over the last 5 years, leading to a compound annual growth rate (CAGR) of just 3.5%. Free cash flows surged in 2020 but then dipped back down in a hurry. Today, Clorox's free cash flows have fallen 11% in 5 years.
The generous dividend policy is perhaps the best thing about Clorox. The company has boosted its payouts every year for the last 53 years. The annual payout grew 428% in the last two decades and the effective yield stands at 3% today. Clorox is both a dividend aristocrat and a Dividend King.
And those bountiful payouts are making a big difference to Clorox's investment returns. If you bought Clorox stock 20 years ago and reinvested your dividend checks in more Clorox shares along the way, you would have beaten the dividend-adjusted gains of the S&P 500 (^GSPC 0.02%) over the same period:
CLX Total Return Level data by https://ycharts.com">YCharts
Without the dividend boost, Clorox underperformed the broader market instead:
Inflation trouble
So Clorox looks like a rock-solid performer in the long run, but we haven't looked at the business's health yet. As it turns out, Clorox has run into some serious trouble.
I'm not worried about the recent dip in top-line revenues. The big jump in 2020 always looked artificial and temporary in nature, sure to be matched by a downturn on the other side of that hill. However, Clorox also faced supply chain challenges and rising ingredient costs in 2021. You can call it an inflationary issue, or you can pin it directly on rising transportation and delivery expenses. Whatever you call it, Clorox's profit margins are falling fast, undermining the cash flows that support the all-important dividend payouts:
CLX Gross Profit Margin data by YCharts
The company plans to soften the inflation damage by raising prices across the board, thus passing the buck to customers further down the distribution pipeline. In the end, price increases will go full circle and lift inflation rates even higher. I'm not saying that Clorox is to blame for inflation in the U.S. and around the world, but this reaction is indeed a part of that bigger puzzle.
I'm not absolutely sure that Clorox is pushing the right buttons to get out of this tailspin. Dividend checks added up to $566 million over the last four quarters while free cash flows stopped at $563 million. That five-decade streak of rising dividends may come to an end if the free cash flows dip much lower.
The stock is trading at lower share prices nowadays but the price is low for a good reason. Clorox does not strike me as a great investment right now.
