It's hard to get investors to boost your stock after you report quarterly earnings that miss analysts' estimates, but Church & Dwight
For the fourth quarter, the company behind Arm & Hammer products and Trojan condoms reported earnings per share of $0.86 -- after adjusting for pension and restructuring charges -- versus Wall Street expectations of $0.89. That compares to $0.74 in unadjusted earnings last year. Fourth-quarter results were affected by the fact that the quarter was six days shorter than the comparable quarter last year, and that helped drive a 2.1% decline in sales.
With relatively underwhelming results like that, why were Church & Dwight shares up 2% yesterday? I'm guessing it has a lot to do with the company's doubling its dividend, to $0.34 per quarter.
Exciting? Yes. But part of the reason the company was able to do that is that it hasn't been overly generous with shareholders to date. Prior to the big bump, Church & Dwight shares yielded 1%, which is pretty chintzy when compared to a 2.8% yield at Colgate-Palmolive
Between 2000 and 2010, Church & Dwight tripled its dividend, but that was over a period that its earnings went up eight-fold. Over the same period, P&G raised its dividend roughly in line with its earnings growth while both Colgate-Palmolive and Clorox had dividend growth that actually exceeded earnings growth.
Of course, this leaves open the possibility of more good dividend news ahead for Church & Dwight. After the increase, the company's payout ratio will be roughly 30% for 2011, which is still below most of its competitors. That means the company will still have room to comfortably grow its payout faster than its earnings.
Specifically, the economy continues to weigh on the sector. There has been some talk -- recently from Clorox -- that there are signs that demand is building into 2011, but from the backward-looking basis of the fourth quarter and full year 2010, it still looks like a tough environment. As part of that, Church & Dwight -- again, similar to competitors -- shelled out more on both trade spending and advertising. I think this speaks as much to the direct challenge of a bad economy as it does to the pressures from private-label competition.
International sales were a bright spot, with fourth-quarter sales – six-day disadvantage and all -- growing 7.2%. On the flip side, Church & Dwight became the latest consumer goods company to join the chorus singing a dirge against rising commodity prices. Though the company's adjusted gross margin was up 40 basis points from last year, it noted that rising commodity costs provided a drag.
With shares trading at roughly 16 times the $4.38 midpoint of management's 2011 earnings-per-share guidance, I don't think the stock is particularly cheap or overly expensive. As such there doesn't seem to be good reason for current shareholders to sell, nor is there any rush for nonshareholders to jump on board.
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