Growth Prospects
Clorox has grown its earnings-per-share at just 5.2% a year over the last decade. Dividends have grown much faster – at 11.3% a year – as the company has nearly doubled its payout ratio over the last decade.
Over the long run, Clorox’ dividend payments can only grow as fast as earnings-per-share.
Clorox’ earnings-per-share growth over the last decade is from:
- Sales growth of ~2% a year
- Share count reductions of ~2% a year
- Net profit margin gains of ~1.5% a year (from 9.5% to 10.7%)
As you can see, Clorox’ has only managed to grow its sales at around the pace of inflation over the last decade. This, of course, is not preferable.
Going forward, Clorox management is expecting 3% to 5% sales growth a year. The company realized 5% constant-currency sales growth in its most recent full fiscal year.
Factoring in the company’s 10 year history of 2% sales growth, I estimate future sales growth for Clorox at between 2% and 5% a year.
Share repurchases have helped increase earnings-per-share for Clorox over the last decade. Unfortunately, the company cannot keep repurchasing 2% of shares outstanding every year at current prices.
Clorox has a shareholder yield (dividend yield + share repurchases) of 4.5%. The company has an earnings yield (earnings dividend by price) of 4.0%… A company can’t keep paying out more than it makes for long.
I expect total returns of 7% to 11% a year going forward for Clorox shareholders, from the following sources:
- Dividend yield of 2.5%
- Sales growth of 2% to 5% a year
- Share count reductions of 1.5% a year
- Net profit margin gains of 1% to 2% a year
Recession Performance
Clorox performed exceptionally well through the recession of 2007 to 2009. The company managed to grow earnings per share each year of the Great Recession.
Clorox’ earnings per share from 2007 to 2010 are listed below:
- EPS of $3.23 in 2007
- EPS of $3.24 in 2008
- EPS of $3.81 in 2009
- EPS of $4.24 in 2010
The company’s excellent performance through the recession shows that consumers continue to buy the company’s branded products in times of economic hardship.
If the last recession is any indication, Clorox’ underlying business will perform well through the next recession (whenever that may be).
Valuation & Final Thoughts
Clorox Co (NYSE:CLX) is currently trading for a price-to-earnings ratio of 25. The company is trading well above its historical average price-to-earnings ratio of 19.7. A fair price-to-earnings ratio range for the company is between 18 and 20 given the company’s excellent performance over a wide variety of economic conditions and extremely low stock price standard deviation of just 18.5%.
There’s no question that Clorox is a high quality shareholder friendly business with a strong competitive advantage. The company’s low stock price standard deviation makes holding Clorox relatively easy, versus more volatile stocks.
Unfortunately, the company’s stock is very likely overvalued at current prices. As a result Clorox is a hold at current prices using The 8 Rules of Dividend Investing.
Disclosure: None
