It's hard to build an entire company around a single product, but WD-40 Company (WDFC -0.33%) 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.
Image source: Getty Images.
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.
WDFC Revenue (TTM) data by YCharts
Revenue has grown an average of 4% annually over the past decade, and earnings per share (EPS), the amount of net income per share of stock, has risen 9% annually due to share repurchases.
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.
WDFC PE Ratio data by YCharts
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.
