Wednesday, January 28, 2015

The Clorox Company (CLX) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of The Clorox Company (CLX). Below are some highlights from the above linked analysis:

Company Description: The Clorox Company is a diversified producer of household cleaning, grocery and specialty food products is also a leading producer of natural personal care products.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CLX is trading at a premium to all four valuations above. Since CLX's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 20.5% premium to its calculated fair value of $89.95. CLX did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

CLX earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. CLX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1968 and has increased its dividend payments for 39 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $440 is below the $500 target I look for in a stock that has increased dividends as long as CLX has. The stock's current yield of 2.73% exceeds the 2.47% estimated 20-year average MMA rate.

Memberships and Peers: CLX is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Procter & Gamble Co. (PG) with a 2.8% yield, Colgate-Palmolive Co. (CL) with a 2.1% yield, and Kimberly-Clark Corporation (KMB) with a 2.9% yield.

Conclusion: CLX did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks CLX as a 2-Star Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $103.64 before CLX's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 39 years of consecutive dividend increases. At that price the stock would yield 2.9%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.7%. This dividend growth rate is lower than the 4.2% used in this analysis, thus providing no margin of safety. CLX has a risk rating of 1.75 which classifies it as a Medium risk stock.

As a consumer goods company, CLX sells products with a stable demand that are generally not affected by changes in the economy. Its products are well known and include these popular brands: Fresh Step, Brita, Glad, Pine-Sol, Hidden Valley, Scoop Away, K C Masterpiece, S.O.S., Kingsford, Tilex, Formula 409, Liquid-Plumr, and its namesake Clorox. The company's presence in the natural home/personal care products arena through Burt's Bees and GreenWorks is viewed positively by environmentalists.

CLX's financial performance has been inconsistent. In the company's fiscal first quarter ended September 30, CLX struggled with unfavorable foreign currencies, primarily from Argentina as well as higher trade spending. Earlier, the company announced, Clorox Venezuela would be treated as discontinued operations effective Sept. 22, 2014. Benefiting from strong cost savings, price increases and volume growth, the company announced earnings from continuing operations of $145 million ($1.10 per diluted share), up from $139 million ($1.05 per diluted share) in the prior year quarter.

The company's Debt To Total Capital of 93% is down from the 98% August 2014 review, and its Free Cash Flow Payout of 56% decreased from 58% in August 2014. The stock is trading above my calculated fair value of $89.95. I will not be a buyer in the near-term.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was held no position in CLX (0.0% of my Dividend Growth Portfolio). I am long in PG and KMB. See a list of all my dividend growth holdings here.

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Tags: CLX, PG, CL, KMB,