Clorox (CLX -0.15%) has increased its dividend annually for 45 consecutive years, making it a Dividend Aristocrat. It has worked through some very difficult periods over that four-and-a-half-decade span, but still managed to reward investors for sticking around.

Right now, Clorox is dealing with some difficult headwinds and investors are clearly worried. But management is doing exactly what it said it would, and that's good enough for me.

A difficult time

Clorox's dividend yield is around 3.2% today, which is toward the high end of the company's yield range. This suggests that the stock is trading at a historically attractive valuation. However, any conversation about Clorox has to include the fact that shares are down nearly 40% from their mid 2020 highs. Why?

A person holding their face with a computer showing stock losses in the background.

Image source: Getty Images.

Early in the coronavirus pandemic, consumers were attempting to protect themselves by augmenting their cleaning habits. Clorox's health and wellness division sells cleaning products and witnessed a huge boost in demand. The company leaned into that demand, hiring contract manufacturers so that it could keep store shelves full.

As the world has grown more accustomed to living with COVID, however, demand for cleaning products has waned, and so too has the performance of Clorox's health and wellness business. It's a lingering issue, with sales in this division, the company's largest business line, down 5% in the fourth quarter of fiscal 2022 (ended June 30).

This sales headwind has come at the same time that the company is facing rising costs due to inflation. Profit margins have taken a big hit, with a shocking 12.4 percentage point decline in profit margins in the second quarter of 2022, which was a painful low-water mark. The stock sold off sharply on that news, and investors have taken a glass-half-empty view of the company since that point. 

Moving in the right direction

Here's the thing: Clorox acknowledged the problem and laid out a plan to slowly return margins to their previous levels. The process basically includes cutting costs and increasing prices, which is exactly what you would expect. On the cost-cutting side, the contract manufacturing deals it inked are being allowed to lapse, allowing management to trim this expense and curtail extra production that's no longer needed.

On the price front, Clorox is doing what every other consumer staples company is doing: passing rising costs on to consumers wherever it can. There's obviously a lot more work being done, and still left to do, but management is taking the steps necessary to improve margins, just like it said it would.

More importantly, Clorox's efforts are already producing results. In the fiscal third quarter, margins were down 7.6 percentage points. That's not good, but it is much better than a 12.4 percentage point decline. And in the fiscal fourth quarter gross margin was flat year-over-year. To be fair, that flat performance is still below historical levels, so the healing process is far from complete -- but management is clearly doing exactly what it said it would do. That's what a long-term investor should want to see.

And behind that big picture, there's another fact to consider. While Clorox's health and wellness business has been facing notable turbulence, the rest of its business (nearly three quarters of its sales) is still showing solid sales growth. In other words, investors appear to be punishing Clorox because a third or so of its business is facing headwinds that management seems to be dealing with fairly capably. That looks like overkill to me, and an opportunity for long-term dividend investors.

Still time to act

Even good companies go through ups and downs, and right now Clorox is in the dumps. But a company doesn't achieve Dividend Aristocrat status by accident. This is one company that has earned the benefit of the doubt, with recent improvements in gross margin proving that management is capable of achieving the goals it sets. Yes, there is more work to be done. No, it won't be a quick fix. But for investors looking to add a strong dividend-paying company to their portfolios, Clorox is still worth a close look.

I, for one, remain pleased that it is in my portfolio, and management's progress on the margin front has made my conviction in this stock's long-term appeal even stronger.