Finding financially stable businesses that can be the bedrock of your portfolio at a significant discount is almost any investor's dream. Unfortunately, these sell-offs on blue chip dividend growers almost always come with some investing baggage.
The 110-year-old household goods behemoth Clorox (CLX -0.69%) is a perfect example.
Plagued by supply chain disruptions, a $445 million goodwill write-off, and, most recently, a cyberattack that temporarily halted its operations, things could hardly be going any worse for the formerly steady-Eddie Clorox.
So, is this a potential death knell for a company that has posted a total return north of 15,000% over the last half-century?
Probably not. In fact, I think it could be a magnificent buying opportunity for risk-tolerant investors looking a decade or more out. Here is why.
Battling a confluence of problems
In August, Clorox announced that it was hit with a cyberattack from the same hacking group that disrupted MGM Resorts and Caesar's Entertainment. The attack on Clorox's information technology systems caused the company to temporarily halt production at many plants and is believed to have affected all of its facilities in the United States.
While remediation is underway and the company is steadily restoring production, management expects a minimum sales drop of 23% and earnings-per-share (EPS) to break even in a best-case scenario. Hopefully, this should be a one-off event for Clorox -- but it couldn't have come at a worse time.
Launching its five-year, $500 million digital transformation in 2021, the company was in the midst of replacing its enterprise resource platform and moving most of its operations to the cloud. This investment was intended to fix the company's supply chain operations, which were the primary culprit (albeit in a brutal macroeconomic environment) for Clorox's gross profit margin dropping from 46% to 36% from 2021 to 2022.
Making matters worse, the company is writing down another $455 million in goodwill from its vitamins, minerals, and supplements (VMS) unit -- after doing the same for $329 million in 2021. Thanks to this confluence of events, Clorox has declined almost 50% from its all-time highs.
So, what exactly makes Clorox a magnificent S&P 500 stock to consider today?
More than 80% of Clorox's brands are No. 1 or 2 in their vertical
With nine in 10 American homes using at least one Clorox product, the company's four segments are home to a variety of instantly recognizable brands:
- Health and Wellness: Clorox, Pine-Sol, Liquid-Plumr, Tilex, and Formula 409.
- Household: Glad bags, Kingsford charcoal, and Fresh Step cat litter.
- Lifestyle: Hidden Valley Ranch and flavoring, Burt's Bees, Brita water filtration.
- International: Most of these brands and a few extra are sold globally.
Thanks to these powerful brands -- which rank 29th on Comparably's Top Brands in Consumer Goods rankings -- Clorox is uniquely positioned to rebound should some of its products go out of stock amid its production disruption.
Furthermore, while the company's 2024 financials will undoubtedly be impaired, its cash generation has been as good or better than most of its peers on a cash return on invested capital (ROIC) basis.
CLX Cash Return on Capital Invested (CROCI) (TTM) data by YCharts.
This impressive cash ROIC highlights the company's ability to generate outsized free cash flow (FCF) compared to its debt and equity -- a proposition that has a history of beating the market over the long haul. Best yet, despite this impressive FCF creation amid a rough few years, Clorox is tied as the "cheapest" stock of its peer group with a price-to-sales (P/S) ratio of just 2.
How should investors approach Clorox?
By virtue of this recently discounted price, the company's recent 3.9% dividend yield is the highest it has been in the last decade, yet it only uses 63% of its FCF. With a streak of 45 consecutive years of dividend increases on the line, Clorox will likely inch its dividend higher again despite its current troubles. However, investors should not expect a major payout boost until there's good news on the cyberattack's remediation and the company's production.
With a price-to-FCF ratio of just 16, a dividend yield well above average, and numerous market-leading brands, it is tempting to go "all-in" on Clorox. However, it would be wise for investors to consider dollar-cost averaging into a position in the historically magnificent yet currently beleaguered S&P 500 business. By building a position in Clorox over time, investors can capture various cost points on their purchases while buying themselves time for new information from the company.
With Clorox set to report earnings on Nov. 7, I'm happy to begin slowly building a small position in the company while waiting for more in-depth information from management.
