Clorox (CLX -0.69%) isn't the flashiest company on paper. And it hasn't been a good stock to own, either, down 16.9% over the last five years. And even if you factor in dividends, the investment still lost value over that time period.
But investing isn't about how glamorous a business is or what it has done; it's about where it could be headed. Clorox stock has quietly surged over 14% in the past week. That's a big move for a boring behemoth consumer staples stock.
There's reason to believe it could be just the beginning of a turnaround for the company. Here's why Clorox is a dividend stock that is worth buying now.
Image source: Getty Images.
Clorox has been under pressure
There are very good reasons why Clorox stock has been under pressure for the last five years. The COVID-19 pandemic led to a surge in the stock as sales soared and margins improved. Clorox boosted its sales, general, and administrative spending in an effort to bet on a sustained shift in consumer behavior toward hygiene and germ prevention.
CLX SG&A Expense (TTM) data by YCharts.
But the performance windfall proved temporary. Things went from all-time great to bad quickly as Clorox was hit hard by supply chain disruptions and inflationary pressures. The worst came in August when Clorox suffered a costly cyberattack that severely damaged its performance on top of the struggles it was already dealing with to that point.
So, you have a company that was doing fine, then posted historic results, then regressed to abysmal results, all within a relatively short period of time. That's a lot for investors to digest. And it is understandable that some folks took a look at Clorox's plummeting margins and rising costs and decided to run for the exits. But that decision may prove to be the wrong one in time.
A strong portfolio of brands
Clorox stock captured the spotlight during the worst of the pandemic due to its perception as a cleaning products company. And while that's a big part of what Clorox does, the company is much more diversified than you may realize.
For example, health and wellness made up 36.4% of fiscal first-quarter 2024 sales, followed by 23.4% from household, 16.5% from lifestyle, and 4.2% from corporate and other. The wellness segment includes brands like Burt's Bees, vitamins and supplements companies Natural Vitality, Neocell, RenewLife, Rainbow Light, and more. Meanwhile, brands like Clorox fall into the household category. So, the company's biggest segment by revenue doesn't even include its namesake Clorox brand.
The biggest mistake investors can make with a company like Clorox is assuming it is just a cleaning product story when it's not. This is a conglomerate that owns brands like Glad trash bags, Brita water filters, Kingsford charcoal, and more. The name of the game is acquiring and nurturing brands while managing costs and sustaining high margins so the company can do well no matter the market cycle and support a growing dividend.
Before the pandemic, Clorox was very good at executing a stable business model with moderate growth. But lately, it has not done a good job managing costs or predicting market trends. Its latest cybersecurity debacle isn't a good look, either. However, Clorox does have a lot of brands that are at or near the top of their respective categories. And for that reason, Clorox has the potential of a company worth owning over the long term.
A growing dividend
If there's one factor that has held the Clorox investment thesis together despite all the instability, it is the dividend. Clorox has paid and raised its dividend every year for 37 consecutive years. The increases have been sizable, too. Over the last 10 years, the dividend has grown by 69%. The increases, paired with Clorox's struggling stock price, have pole-vaulted the yield to 3.7%. That stacks up well to its competitors.
CLX Dividend Yield data by YCharts.
So, if you're looking for higher yield opportunities in the consumer staples space, Clorox offers investors a compelling yield paired with a depressed stock price.
The stock is not as expensive as it looks
Just because a stock has gone nowhere or down over a period of time doesn't necessarily mean it is cheap. And in Clorox's case, the stock actually looks fairly expensive.
Selling, administrative, advertising, and sales promotion expenses are expected to be about 27% of fiscal 2024 sales, which is very high. Some of that is due to the impact of the cyberattack. But it is also Clorox's overly aggressive spending.
Clorox is guiding for fiscal 2024 diluted earnings per share (EPS) of $2.10 to $2.60. But after adjusting for pension settlements, cyberattack costs, the impact of its streamlined operating model, and digital capabilities and productivity enhancements investment, the adjusted earnings are forecast to be $4.30 to $4.80.
Even on an adjusted basis, Clorox has a forward price-to-earnings (P/E) ratio of around 29 at the midpoint of its guidance. That's a hefty price for a struggling company with a low growth rate.
However, valuing Clorox on where it is today isn't the best approach. Rather, if we look back at where Clorox was pre-pandemic, it booked $6.32 in diluted EPS in fiscal 2019 and $6.26 in fiscal 2018. If Clorox got back to those levels, its P/E ratio would be closer to 20. It's still not a dirt-cheap stock. However, it is a good price for a company with a strong brand portfolio and a high dividend yield.
Patience is key with Clorox
Clorox stock would be a hard pass or even a sell if we were looking at how the business is doing now and how it is expected to perform in fiscal 2024. But zoom out, and the stock could start to look like a great value if it gets its costs and efficiency improvements under control.
If you're interested in Clorox stock, there are two basic ways to approach it now. The first is to wait for the turnaround to take place. The second is to buy the stock and let the story play out while collecting a nice dividend. Either way, there's really no rush to pile into Clorox, given that the stock just made a big move to the upside.
But there's also no real reason to wait, given how attractive the dividend is. In sum, the worst seems to be over for Clorox. It has the brand portfolio needed to support future dividend growth and be a worthwhile investment.
