No business survives for more than 100 years, as Clorox (CLX 2.17%) has, without going through some ups and downs along the way. Clorox currently faces some notable headwinds. The question for investors is whether or not management can muddle through them. So far it's doing a pretty good job.
An incredible record
Clorox's history dates back more than a century, but dividend investors will likely be more interested in its 46-year streak of annual dividend increases. The current yield is around 2.7%, which, while not exactly a screaming buy, is fairly attractive, historically speaking. Notably, the dividend has been increased at a compound annual rate of nearly 6.5% over the past decade. That is around twice the historical rate of inflation growth, so over time the buying power of the consumer staples maker's dividend has increased.
Image source: Getty Images.
Add in the company's iconic brands, including its namesake brand as well as Britta and Glad (among many others), and there's a lot to like here for long-term income investors. But inflation isn't an issue to simply gloss over today. The historical inflation average is one thing, but today inflation is running hot, and it is taking a steep toll on Clorox's business. The coronavirus pandemic also complicates things.
In 2020, as the illness was spreading around the world, demand for Clorox's cleaning products spiked. But that was a temporary boost, and as that demand inevitably cooled off, inflation started to spike. That left the company with falling demand and rising costs, a very bad combination that came to a head in the second quarter of fiscal 2022 (ended Dec. 31, 2021). That was when Clorox's gross margin collapsed 12.4 percentage points year over year.
NYSE: CLX
Key Data Points
Investors were rightly shocked by the massive decline and quickly sold the stock. Management promised that it had a plan to address the issue.
Clorox is doing what it said it would
Clorox basically said it was going to do the same thing that every other consumer staples company says it is going to do when inflation hits: cut costs and raise prices. There are, of course, fine details to the story, like the prescient use of contract manufacturers during the pandemic-related demand spike that made it easier to reduce costs when demand normalized. But the bigger issue for investors is really whether or not management is getting results.
The answer is a pretty resounding yes, though the work is nowhere near complete. Indeed, the company has been very clear that this will be a multi-year process. The combination of a global pandemic and then an incredibly rapid rise in inflation are the main reasons for this, as the tools to improve gross margin can take a little time to implement. And sometimes adjustments need to be made if things like price increases meet consumer resistance.
|
2Q 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 | |
|---|---|---|---|---|---|---|
|
Basis Point Change |
-1,240 |
-760 |
0 |
-110 |
320 |
590 |
Data source: Clorox.
More than a year into the process, however, Clorox managed to get gross margin expanding again. There were some one-time items that led to the outsized fiscal 2023 third quarter (ended March 31) improvement. Specifically, a supply issue at a competitor increases sales of some Clorox cleaning products. So the fiscal 2023 fourth quarter (ending June 30) gross margin probably won't be as strong. However, the improving trend is clear, and shows that management executed needed changes exactly in the way it said it would.
Important signals
When times get tough you often find out just how good a company's management team is. Clorox was open about the problem it faced, laid out a plan to fix the issues, and proved it can execute in bad markets just as well as it can in good ones. This is exactly the type of performance that long-term dividend investors should want to see.
Although Clorox's 2.7% dividend yield isn't nearly as attractive as it was right after the big gross margin decline, the stock still trades around 25% below its 2020 highs. Long-term investors that prize dividend consistency might still want to take a look.
