Yesterday, Church & Dwight (NYSE: CHD) -- the consumer products specialist behind brands such as Arm & Hammer and Trojan -- added another slap in the face for consumer staple investors. Though earnings topped analyst estimates, investors shaved nearly 5% off the stock's price in freak-out similar to the post-earnings reactions for Procter & Gamble (NYSE: PG) and Colgate-Palmolive (NYSE: CL).
So why couldn't the better-than-expected earnings prevent the sell-off? I'm going to guess it had a lot to do with the reaction to trade spending. In the earnings reports from other consumer staple companies -- whether we're talking Colgate, P&G, or Clorox (NYSE: CLX) -- the talk about marketing spending was focused on the respective companies' support of new product launches. Church & Dwight spent more time lamenting the need for increased trade spending.
If you're not familiar with trade spending, it refers to spending used to get retailers such as Wal-Mart (NYSE: WMT) or Safeway (NYSE: SWY) to give better placement to one of your products, or perhaps pimp it through an in-store promotion. This spending can be a good thing if you're trying to get a new product in front of consumers, but it can sound troublesome when you're upping trade spending just to help current products keep up with competition. And it was the latter situation that Church & Dwight seemed to find itself in.
In the earnings press release, the company's CEO said, "Our second quarter gross margin and organic sales were negatively affected by increased trade spending in response to aggressive competitive pricing actions." For investors, that's about as exciting as a few tablespoons of salt in their coffee.
Of course it's not just Church & Dwight doing this. With skittish consumers now in the majority, a trade spending arms race shouldn't be all that surprising, and we may see more of the same across the sector until consumers start breathing easier again.
This spending increase helped shave 70 basis points from Church & Dwight's adjusted gross margin, and that wins it a prime spot on the "Things Church & Dwight Investors Better Keep an Eye On" list. However, it hardly seems like enough of a reason to freak out yet. After all, there were still plenty of positives in the second quarter: 3.7% growth in organic sales, a higher operating margin, a 27% jump in earnings per share, and a boost to the dividend compared to last year.
After the sell-off, I see Church & Dwight shares as slightly undervalued. It's not enough to get value mavens really excited, but for a company as stable as Church & Dwight, it may be tough to ever find a really steep discount. And though the stock doesn't offer the same kind of current dividend yield as competitors P&G, Colgate, or Clorox, the company has used free cash flow to aggressively pay down debt and has maintained a very low payout ratio, potentially giving more room for future dividend growth.
Not impressed with the dividend at Church & Dwight? My fellow Fool Jordan DiPietro has identified another stock that he thinks could be the best dividend stock.
