Church & Dwight Co., Inc. (CHD): Would You Rather Own Bonds or This Stock?

We remain in the very early innings of a reversal in the secular bear market in stocks and the secular bull market in bonds. The S&P 500 continues to maintain double-digit gains for the year whereas bonds have actually posted a slightly negative return in the first half of the year. Stocks are poised to notably outperform bonds for the remainder of the decade. Investors should continue to look for opportunities to pare bond holdings and increase equity exposure. Doing so could add undue risk, thus it is important to focus on safer alternatives that have a pristine track record. In this case investors often gravitate toward the mega-cap names and miss better opportunities that reside in the mid-cap space. Below is one such example.

Church & Dwight Co., Inc. (NYSE:CHD) was founded more than 160 years ago, but still remains relatively unknown or ignored by most investors. The company generates $3 billion in annual sales via brands such as Arm & Hammer, OxiClean, Trojan, and First Response. The market capitalization currently sits at just under $9 billion, much less than larger peers, and it is generally viewed as a mid-cap.

Strong, consistent earnings growth

What makes the stock such a strong candidate for those swapping out of bonds is the top-notch consistency in the company’s results. They have generated earnings-per-share growth of at least 10% for twelve consecutive years! This is rare class indeed. The worst recession in seventy years, which clobbered most company’s results, did little to Church & Dwight Co., Inc. (NYSE:CHD)’s performance. The Procter & Gamble Company (NYSE:PG) is the bellwether in the consumer products space and still a relatively safe option from a return of capital standpoint. But the company is subpar operationally with just 4% CAGR in operating EPS over the last five years whereas Church & Dwight is four times higher at 12%.

Colgate isn’t a bad investment option for conservative investors thanks to above-average organic sales growth that is a byproduct of dominating their oral care franchise. While Colgate is a good investment option for conservative investors looking to increase equity exposure, especially relative to The Procter & Gamble Company (NYSE:PG), Church & Dwight Co., Inc. (NYSE:CHD) is likely a better option. Colgate has already made their big international push and generates less than 20% of earnings from North America. Conversely, Church & Dwight Co., Inc. (NYSE:CHD) generates more than 75% of earnings from North America. They have a long-tail on their international growth opportunities.

Church & Dwight Co., Inc. (NYSE:CHD) also has higher quality earnings. This can be measured by looking at free cash flow divided by net income. A higher ratio indicates strength in earnings with high cash conversion and less accounting gimmicks.

Magnificent management

Church & Dwight Co., Inc. (NYSE:CHD)’s success stems from operating in industries with steady demand drivers, but also in the ability of management to consistently drive margins higher.

CHD Operating Margin TTM data by YCharts