It's been a good year for the consumer staples sector, which is outperforming the S&P 500 (^GSPC 0.95%) year to date with a near 5% gain at the time of this writing. But Clorox has been noticeably left out of the broader sector rally, with the stock down 19% year to date and hovering around a 52-week low.
Here's why Clorox (CLX 0.13%) stock is under pressure, and why the high-yield dividend stock is worth a closer look in June.
Image source: Getty Images.
Turning the corner
Clorox has faced a number of challenges in recent years, including noncash impairment charges and divestments, a costly cyberattack, added costs from its enterprise resource planning (ERP) system, and the general challenge of trying to predict buyer behavior trends and manage a complex supply chain amid economic uncertainty and high inflation.
The ERP system is a multiyear transition to a cloud-based platform that includes improvements to internal operations, such as supply chain, finance, and data management. During its third-quarter fiscal 2025 earnings call in May, Clorox said that it is on track to implement the U.S. version of its ERP system later this year -- which should lower costs and improve efficiency starting in calendar year 2026.
Despite the challenges, Clorox had been showing considerable signs of improvement -- namely through 10 consecutive quarters of gross margin expansion. Gross margin is a useful metric for analyzing companies that produce and sell products. It shows the percentage of sales that a company is converting into gross profit by taking out the cost of goods sold, which consists of labor and materials (but not sales, general, and administrative expenses).
As you can see in the following chart, Clorox's gross margins tumbled in calendar year 2022 as it badly overestimated pandemic-induced demand and incurred unneeded costs.
It took years for Clorox to recover those margins, and its stock price suffered accordingly. However, investors care more about where a company is going than where it has been. And Clorox's stock price is below pre-pandemic levels, but its margins have recovered, and its sales are considerably higher.
Executing where it counts
Unfortunately, Clorox's latest guidance and commentary on its earnings call point to new tariff-related headwinds that could really throw a wrench in the company's turnaround. Its third-quarter results missed Wall Street expectations and the company lowered its full-year fiscal guidance.
Clorox cited macro and geopolitical factors and tariffs as reasons for the lower guidance. But another factor was the anticipated rollout of its ERP transition, as Clorox's retailer partners are building inventory before the transition occurs. However, Clorox is still expecting organic volume and sales growth and higher gross margins.
Despite all the challenges, the company is still guiding for strong full-year fiscal 2025 earnings of $5.73 to $6.13 and $6.95 to $7.35 on an adjusted basis. Based on the low end of its adjusted range, Clorox would have a price-to-earnings (P/E) ratio of just 19 -- which shows how much the stock has fallen and how earnings have recovered as the company progresses on its efficiency improvements.
The glass-half-full outlook on Clorox is that the worst of its struggles are in the rearview mirror and that the company will be better positioned to capitalize on growth in the years to come, now that it has made divestments and improved its internal processes.
Clorox also has a clear game plan for long-term growth -- known as its IGNITE strategy. The strategy, which includes ERP and divestments, is a way to improve Clorox's product portfolio, how it is presented in front of consumers to boost engagement, and create a better internal operating and workplace environment -- all while keeping environmental, social, and governance factors in mind. Clorox isn't starting from scratch, as it already has an impressive lineup of category-leading brands across staple cleaning products, cat litter, food and charcoal, personal care, and more. In short, Clorox already has a low valuation, but it could look dirt cheap if it can take its brands to the next level and become a better-run company from the ground up.
Clorox's dividend yield has gone up
On top of its low valuation, Clorox also has an impeccable dividend. The company is on track to deliver its 48th year of higher annualized dividends in 2025 -- which showcases Clorox's ability to boost its payout no matter what the economy is doing.
Clorox also has a yield of 3.7%. For context, the broader consumer staples sector -- as measured by the Vanguard Consumer Staples ETF -- yields 2.4% and has a P/E ratio of 24.9. Meaning Clorox is a good value for passive income relative to the sector.
CLX Dividend Yield data by YCharts
As you can see in the chart, Clorox's dividend yield is inflated compared its historical average due to continued raises and its beaten-down stock price.
Clorox is a high-conviction buy this summer
Clorox is a great buy in June for risk-averse investors looking for a reliable dividend stock to boost their passive income stream.
Clorox isn't immune to tariffs but has a fairly recession-resistant portfolio of brands. With the bulk of ERP costs accounted for and the program launching soon, Clorox is well positioned to generate sustained higher margins even if macro conditions remain shaky.
