Simplicity is this business’s best feature
One of Peter Lynch’s investment principles is to invest in an idea that can be illustrated with crayons. The Clorox Co (NYSE:CLX) more than fulfills this parameter with a comprehensible business model. It manufactures various consumer products for daily sanitation and hygiene, the demand for which is relatively inelastic. Such inelasticity shields the business from major revenue swings during periods of recession. Its flagship bleach product enjoys a favorable reputation across the globe, ensuring a sustainable revenue stream. Recently, the company launched a concentrated version of its famous bleach, and this new product is gaining traction in the consumer market.
The numbers are good
For the past few years, The Clorox Co (NYSE:CLX) has been operating with a gross margin of over 40% and following a disciplined expense management system. In the most recent quarter, the company’s gross margin declined by 20 basis points to 42.1% of sales. While logistics cost hurt the margin in a big way, a favorable impact from cost savings and incremental pricing helped in partially offsetting the negative impact. As a result, the company has generated $352 million in free cash flow year-to-date, as compared to $214 million for the same period in 2012. As this Fool article states, The Clorox Co (NYSE:CLX) has successfully generated approximately half of its current valuation in free cash flow. In the 2013 fiscal year, volumes of its bleach products have remained flat because of slight upward changes in price and increased competition from private labels.
Clorox is definitely a dividend champion
Since the recession of 2008, U.S. markets have been experiencing higher level of volatility. During such times, it is prudent to invest in stocks that create reasonable value for shareholders. The Clorox Co (NYSE:CLX) is a valuable company in that regard as it has created impressive value for its shareholders via its dividend policy. It declared a total dividend of $2.48 per share in 2012, an increase of 188% from the $0.86 per share that it offered in 2002. The company has consistently kept its dividend payout ratio below fifty percent in order to build up cash for capital expenses. Recently, the company has been piling cash in order to finance its bolt-on acquisitions.
Industry rivals
A leader in consumer products, The Procter & Gamble Company (NYSE:PG) offers an array of packaged goods. At the beginning of 2013, it sold out a portion of its bleach business to its counterpart in the Italian joint venture that it has operated with the Angelini group. The company cited its concern in terms of market reach for its bleach products as a reason for the divestiture. Like Clorox, The Procter & Gamble Company (NYSE:PG) has also maintained a healthy dividend policy. The company trades at a lower price-to-earnings multiple than The Clorox Co (NYSE:CLX), however, which puts it on a higher pedestal. Apart from a reasonable valuation, it also possesses strong financials. Its current debt-to-equity ratio stands at 0.48, which is quite impressive considering the fact that it operates in multiple categories and also returns a sizable amount of cash to its shareholders.
