Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:
- Earnings growth.
- Changes in valuation multiples.
In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Clorox
Clorox shares returned 145% over the past decade. How'd they get there?
Dividends accounted for about one-third of it. Without dividends, shares returned 90% over the past ten years.
Earnings growth was strong during the period. Clorox's earnings per share grew at an average of 11.3% per year over the past 10 years. That's well above the market average, and puts the company in the top tier of large-cap companies. A lot of the earnings-per-share growth was driven by a reduction in the number of shares outstanding, which fell by 42% over the period.
And have a look at the valuation multiple:
Source: S&P Capital IQ.
Clorox's P/E ratio has indeed come down since the early 2000s, which was the tail end of the dot-com bubble. But for the most part, it's been fairly stable, at least compared with other large-cap companies. Procter & Gamble's
Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.
- Add Clorox to My Watchlist.