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Church & Dwight, Clorox, and Colgate-Palmolive: 3 Companies for Your Watch List

By William Bias – Feb 12, 2014 at 11:45AM

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When looking for investment ideas, consider looking toward personal goods companies that make toothpaste and deodorant.

Looking at the companies that make and sell products such as toothbrushes, laundry detergent, and soap represents a good starting point for investment ideas. Personal product companies Church & Dwight (CHD -1.38%), Clorox (CLX -0.95%), and Colgate-Palmolive (CL -0.46%) characterize good examples of such companies. They sell products under well-known brand names, but just because a company sells well-known products doesn't mean it will make a good investment. Investors must check out the underlying financials or fundamentals and assess potential future performace.

More than Arm & Hammer
Church & Dwight is most well-known for its Arm & Hammer brand of products such as baking soda, laundry detergent, and cat litter. However, it also sells products under the Oxiclean, Nair, Trojan, and Orajel brands. Last year, Church & Dwight grew its revenue and net income 9% and 13%, respectively.  Its free cash flow declined 4%,  stemming from the shift of an estimated federal tax payment into the first quarter of 2013 due to Hurricane Sandy.  The international arena served as the biggest area of growth in 2013 with sales growing nearly 4% versus domestic growth of 2% when factoring out foreign currency fluctuations and acquisitions.  

Church & Dwight keeps a solid balance sheet with its $497 million in cash translating into 22% of its stockholder's equity. Its long-term debt to equity ratio equates to only 28% of stockholder's equity,  meaning that its profitability will not get choked out by interest expense.  Last year, Church & Dwight paid out 36% of its free cash flow in dividends. Church & Dwight just recently announced an 11% increase in its annual dividend rate paid to investors.  In 2014, Church & Dwight will pay $1.24 per share per year, equating to a 1.9% dividend yield.

Bleach and more
You probably know Clorox as a brand of bleach used in the laundering of clothes. The namesake Clorox Company also sells other well-known, and perhaps not so well-known, brands such as Glad trash bags, Hidden Valley salad dressing, Kingsford charcoal, and Burt's Bees personal care products . Clorox only grew its year to date revenue 1%, while net income declined 2%. Company free cash flow declined 56% year to date.  Clorox's international segment fared the best with sales growing 9%, when factoring out foreign currency translations,  followed by its cleaning segment which saw a sales increase of 2%  due to marketing and gains in the professional segment.

Volume declines in Clorox's lifestyle and household segments served as a drag on overall revenue growth. Increased competitive activity served as an underlying culprit.  Commodity inflation helped drive net income lower. Clorox maintains a debt laden balance sheet resulting in a low stockholder's equity balance. Its $2.1 billion in long-term debt represents nearly 1,400% in stockholder's equity.  Operating income does exceed interest expense by nine times. The rule of thumb for safety resides at five time interest or more.  Last year, Clorox paid out 47% of its free cash flow in dividends . Currently, Clorox pays its shareholders $2.84 per share per year and yields 3.3%.

Keeping it clean
Colgate-Palmolive sells personal care products such as Colgate toothpaste, Palmolive dish detergent, Speed stick deodorant, and animal nutrition products under the Hill's Pet Nutrition segment. Last year Colgate-Palmolive's revenue increased 2%, while net income declined 9%.  Increased capital expenditures drove free cash flow down 6%.  Foreign currency fluctuations and non-recurring items put a dent in Colgate-Palmolive's reported top and bottom line growth.  Colgate-Palmolive's latest balance sheet information indicates cash of stockholder's equity.  Last year, Colgate-Palmolive paid out 54% of its free cash flow in dividends.  Currently, the company pays its shareholders $1.36 per share per year yielding 2.2%.

Foolish takeaway
Church & Dwight, Clorox, and Colgate-Palmolive face lower growth prospects domestically  and will need to focus on overseas expansion. Product differentiation will also drive growth. Moreover, increased efficiency will drive margin growth especially for the larger companies. Investors should keep an eye on Clorox's debt-laden balance sheet to see if they will ever deleverage, otherwise the company's prospects as business, dividend payer, and as an investment remain inhibited. Businessweek anticipates that Church & Dwight, Clorox, and Colgate-Palmolive will grow revenue 3% , 2% , and 3%,  respectively. Feel free to add these companies to your Motley Fool Watch List to keep track of relevant news feeds to aid to your research.

William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Stocks Mentioned

Clorox Stock Quote
$148.78 (-0.95%) $-1.43
Colgate-Palmolive Stock Quote
$77.78 (-0.46%) $0.36
Church & Dwight Stock Quote
Church & Dwight
$80.03 (-1.38%) $-1.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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