Often the best investmentsare not in high-flying technology powerhouses with astronomical top-line growth and an extremely high valuations. While those companies should possibly play a role in your portfolio, the savviest investors know that investing in highly profitable, dividend-paying companies will often offer the best long-term rewards.
Thanks to large profits and strong cash flow, these companies have the ability to buy back shares and pay dividends and The Clorox Company (NYSE:CLX) is a prime example. For starters, Clorox returned $2 billion worth of capital to shareholders through dividends and buybacks in 2013, including a 60% increase in the dividend. But the past doesn't matter. Let's take a look at what Clorox is doing to make sure it will have the ability to continue to reward shareholders all the way through 2020.
If a company wants to succeed, it must trust its people. Clorox does this in a big way, and it seems to be effective. Clorox wants to continue this trend by empowering its people to make decisions that will lead to better speed and efficiency. For the record, Clorox's score of 87% for employee engagement was above the global benchmark of 80% for 2013.
Clorox in 3D
No, you're not going to be able to watch your stain remover act in 3D. Rather, this pertains to Desire, Decide, and Delight. This is Clorox's model for engaging customers prior to their purchase, during their purchase, and after their purchase.
Clorox aims to take consumer engagement a step further via deeper insights and digital capabilities. In regards to the latter, Clorox will target more personalized consumer engagements. Clorox is aware of the growing e-commerce trend, and it looks to capitalize on that trend.
Do 60% of consumers choose Clorox over other products in those categories? More than half the time, yes. Logically, Clorox will focus more on those products going forward, as they're likely to lead to higher profitability.
Speaking of profitability, Clorox uses an interesting term called "cost-o-vation." This refers to cutting costs for a product while also delivering improvements to that product. Clorox will look to build on this approach going forward, and its geographic location in Silicon Valley (near many technology firms) gives it an advantage. Clorox has easy access to a large quantity of innovative minds.
Profitable category growth
A big reason for Clorox's recent success has been its growth in health care. Therefore, Clorox will continue to look for growth in health care facilities. It will also look for growth in high-growth countries. Chile, Colombia, and Peru have been the fastest growing countries for Clorox, and Clorox looks to expand in Canada, Latin America, Australia, New Zealand, and the Middle East.
Venezuela and Argentina have been weak due to price controls and high inflation. Clorox will combat these trends by optimizing cash flow through cost savings.
Clorox aims to reduce waste in work, products, and in its supply chain by focusing more on speed and efficiency. While nothing is guaranteed, Clorox has shown 150 basis point margin expansion every year over the past decade. Based on the above initiatives, Clorox expects to grow net sales 3% to 5%, expand EBIT by 25 to 50 basis points, and generate free cash flow 10%-12%, through 2020.
For decades, Clorox has been a big winner, and it's clear that it has its head on straight. But we should check to see if it's the best of the best. Below is top-line growth performances for Clorox, Colgate-Palmolive (NYSE:CL), and Procter & Gamble (NYSE:PG) over the past five years:
While Clorox and Procter & Gamble have managed to grow the top line in a difficult consumer environment, Colgate-Palmolive has been the most impressive in this area.
Let's take a look at the bottom line:
Clorox and Colgate-Palmolive have been the top performers on the bottom line.
Based on this information, it should come as no surprise as to which company has outperformed its peers over the same time frame:
As you can see, they're all winners, but not on a relative basis.
Colgate-Palmolive yields 2.10%, whereas Clorox and Procter & Gamble yield 3.20% and 3.00%, respectively. And Colgate-Palmolive is trading at 21 times forward earnings, while Clorox and Procter & Gamble are trading at 18 and 17 times forward earnings. All three companies offer impressive net margins: Clorox 10.17%, Colgate-Palmolive 13.12%, and Procter & Gamble 13.62%.
The bottom line
Clorox isn't growing as quickly as Colgate-Palmolive, but it's still growing, and offers a higher yield. Clorox is all about efficiency, and with a diversified brand portfolio, including Clorox, Pine-Sol, Glad, Kingsford, Hidden Valley, Brita, and Burt's Bees, big profits and strong cash flow should continue to lead to shareholder rewards. As always Foolish investors should do their own research before making any investment decisions but The Clorox Company is a great place to start if you desire a strong business model generating lots of cash.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.