It's hard to build an entire company around a single product, but WD-40 Company (WDFC -0.62%) has done it. It's a multipurpose specialty chemical that inspired the company's name and makes up more than 90% of sales for the business.
The stock itself is very low-key; you will rarely see articles covering the company in the press. WD-40 is well-known among homeowners, though, and becoming familiar with the business behind the product could pay off for investors. Here's why long-term investors should consider this steady winner for their portfolios.
What the heck is WD-40?
Homeowners likely know the product well, but WD-40 is a specialty chemical sold in a spray can for those who don't. It's petroleum-based and has many uses, including lubrication, degreasing, removing rust, cleaning, etc. Any simple internet search will show articles listing dozens of uses for the versatile product.
It always helps with branding when a product is so good that it becomes synonymous with what it is. For example, people might say, "can I have a Kleenex," instead of facial tissue. There seems to be a similar effect, with people using "WD-40" even when simply referencing lubricant or cleaner.
WD-40 Company estimates having a 79% market share among homeowners in the United States for its intended uses and a 57% share among work users.
A "boring" but quality business
WD-40 Company is not a rapidly growing business; it sells a product used occasionally (more often for work users), and there isn't a catalyst to increase demand for the product. People buy it, use it until it's gone, and buy more.
The chart below shows how steady the business has performed for decades; you can walk into virtually any store and buy a spray can, so it's not something that people will shy away from during recessions.
Additionally, WD-40 Company pays a dividend that management has begun raising consistently; the payout has grown for 12 consecutive years. The dividend payout ratio is just 60%, and the dividend yield is 1.7%. It's a solid payout that the company can easily afford, especially with how resilient the company is.
So adding everything together, WD-40 Company grows EPS by about 9% annually, and the dividend adds another 1.7%, giving investors total yearly returns of 10% to 11% on average. On top of that, it's a reliable company that's shown continued growth for decades and through multiple recessions.
Valuation is finally coming down
Many investors like safety and are sometimes willing to assign a premium valuation to companies that can deliver reliable performance over long periods. WD-40 Company seems to fit that description, and the stock has commanded a higher price-to-earnings (P/E) ratio than many other companies growing at a similar rate.
The major indexes are entering bear market territory on their current slide, and it's dragging shares of WD-40 Company down with it. Shares are currently 35% down from their highs of $280. You can see below how the stock's P/E ratio was over 60 at one point but has fallen to 37.
The falling share price is probably healthy; a P/E of 60 feels very steep, even if the company is fundamentally sound. Procter & Gamble is a bonafide blue chip stock that's grown EPS at roughly 8% over the past five years, and its stock currently trades at a P/E of 25.
I wouldn't be rushing to buy the stock on the dip because it's coming down from such an aggressive valuation. Investors could wait for the stock to hopefully fall to a P/E in the 20s, which is more aligned with the stock's valuation before 2018.
A dollar-cost averaging strategy can be a helpful tool if the wait is stressful for you. Ultimately, WD-40 Company is an underrated blue chip that long-term investors should at least be aware of. The stock can be a great addition to most portfolios if the valuation can fall to a level that makes shares more attractive.