Will Clorox Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether Clorox (CLX 0.72%) makes a great retirement-oriented stock.

Clorox is well-known for its stable of consumer products, including its namesake bleach as well as a variety of other cleaning, personal care, and household products. But given the stock's popularity, is it still a good value for investors? Below, we'll revisit how Clorox does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

• Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
• Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
• Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
• Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
• Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Clorox.

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Clorox last year, the company has picked up a point, as its market cap has risen well beyond the $10 billion mark. The stock's strong performance is to blame for that, with the share price having risen more than 25% over the past year.

Clorox is one of the best companies in America, and its long-term performance shows why. With 90% of its products ranking in the top two for market share in their respective categories, Clorox doesn't have the broadest product line, but it definitely has the depth to compete in the areas where it has chosen to stand its ground.

Moreover, it's starting to appear that Clorox has weathered a tough part of its business cycle. Throughout the industry, Procter & Gamble (PG 2.61%), Colgate-Palmolive (CL 2.17%), and Clorox all had to deal with rising costs for the inputs they needed to make their respective products. The companies responded by implementing price-cutting measures and passing on part of their higher costs to their customers. For its part, Clorox was able to expand its gross margins by a full percentage point, with a worse-than-normal flu season contributing to sales. Now that input-cost inflation is easing, P&G and Clorox expect to see better profitability, with growth starting to approach the faster rates that Colgate has enjoyed.

Part of the reason why Clorox shares are fetching such a hefty earnings multiple could be the belief that it would make a promising takeover target. With Warren Buffett having made boring stocks interesting again with the takeover of food giant Heinz, Clorox seems like a company in the same general class as Heinz. Given its size, Clorox would attract attention from only larger buyers, but with plentiful free cash flow, the cheap financing available for buyout deals lately makes it a stronger possibility than usual.

For retirees and other conservative investors, a 35-year track record of rising dividends and a strong current yield are nothing to sneeze at. But given the premium that investors are putting on stocks perceived as safer dividend plays, Clorox seems a bit overvalued to recommend as a must-have stock at current levels. If the stock pulls back somewhat, it would look a lot more attractive as an addition to a retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

Add Clorox to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.