Monday, May 19, 2014

Clorox (CLX) Delivers a Disappointing Dividend Increase

The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. Last week, the company increased quarterly dividends by 4.20% to 74 cents/share. This marked the 37 consecutive annual dividend increase for this dividend champion. It was a disappointing increase however, which is much lower than what I am expecting. This is also the slowest dividend increase since 2006, when dividends were raised by 3.60% to 29 cents/share.

I still like the company, and would continue holding onto the stock I own, based on my original analysis of Clorox. However, I would not be adding to the company in the near future, because the annual dividend growth is lower than my 6% annual dividend growth target. In addition, the stock is trading at the top of my acceptable valuation range of 20 times earnings, although the yield at 3.20% is pretty decent, and sustainable for the time being. The company earned $4.32/share in 2013, and is expected to earn $4.33/share in 2014 and $4.50/share in 2015.

I also do not like the fact that revenues have increased from $4.324 billion in 2004 to $5.623 billion in 2013, but total net income went from 549 million to 572 million. Earnings per share went from $2.56 in 2004 to $4.30 in 2013, mainly due to massive share buybacks in 2005 and 2006. Those share buybacks resulted in negative book values per share, which are scaring novice investors. Many investors are thrown off from the supposed high debt levels for Clorox, but I am not seeing any reason for worry. The company could easily pay off all of its long-term debt within less than 3 – 4 years based off its free cash flow. Of course, in the current low yield environment, the incentive is to lock in those ridiculously low rates, not repay debt with cash that can deliver higher value to shareholders or by reinvesting in the business.

The chart below teaches one important lesson for dividend growth investors. The lesson is that dividend growth rates can fluctuate over time, and are not going to be consistent every single year. It is important to understand this, in order to avoid having unreasonable expectations. It is also important to note that one should not panic and sell, because of one or two years where the dividend is not increased fast enough. Year over year dividend growth can be lumpy, yet the ten year average growth could turn out to positively surprise investors. There were nine quarters between 2000 and 2002 and six quarters between 2003 and 2004, where dividend payments were unchanged. Despite this, annual dividend payments still increased every year during that period. However, investors who panicked and sold because they didn’t like the freeze missed out on a dividend that almost tripled.

Decl Date
Qtrly Dividends
Increase %
05/12/14
0.74
4.23%
05/12/13
0.71
10.94%
05/14/12
0.64
6.67%
05/18/11
0.6
9.09%
05/19/10
0.55
10.00%
06/11/09
0.5
8.70%
05/14/08
0.46
15.00%
05/24/07
0.4
29.03%
11/15/06
0.31
6.90%
11/16/05
0.29
3.57%
11/17/04
0.28
3.70%
07/16/03
0.27
22.73%
07/16/02
0.22
4.76%
07/19/00
0.21
5.00%
07/20/99
0.2
11.11%
07/14/98
0.18
12.50%
07/16/97
0.16
10.34%
07/17/96
0.145
9.43%
07/19/95
0.1325
10.42%
07/19/94
0.12
6.67%
03/19/93
0.1125
7.14%
04/16/92
0.105
7.69%
04/19/91
0.0975
8.33%
04/20/90
0.09
16.13%
04/21/89
0.0775
19.23%
03/18/88
0.065
18.18%
04/21/87
0.055
15.79%
04/18/86
0.0475
11.76%
04/29/85
0.0425
13.33%
04/30/84
0.0375
15.38%


Full Disclosure: Long CLX

Relevant Articles:

Clorox Company (CLX) Dividend Stock Analysis
Dividend Champions - The Best List for Dividend Investors
Should you sell after a dividend freeze?
When to sell your dividend stocks?
How to read my weekly dividend increase reports

8 comments:

  1. I have always considered your quantitative approach a great strength but working in the consumer products field myself I can't help but feel some "qualitative" wariness about any company that is built on brand name marketing. Of course bleach is just a small part of Clorox's business but I'm afraid that many people learned during the recession that house brand bleach gets their clothes just as white as Clorox bleach. Likewise for P&G, out of work people don't buy Febreeze. Our company is getting squeezed harder and harder by our big consumer products customers as they try to maintain their margins and soon there will be no more to squeeze. At that point either prices will go up or margins will go down. Maybe the economy is about to come roaring back, but if it doesn't, you may see more disappointing dividend increases in the near term. So this is a time to be light on our feet, and ready to follow our quantitative signals that tell us when to sell.

    ReplyDelete
    Replies
    1. Well, generics have always been a threat to consumer staples, but I don't think consumers prefer generics to branded items. In addition, not everyone is out of work, are they? Plus, there are increasing numbers of middle class consumers worldwide. Short-term weakness has happened before in consumer staples. The main issue here is that valuations don't make sense, but that's not a reason to sell yet.

      I do not think one needs to be scared away by a small dividend increase, unless of course they got in Clorox with the gambler mentality. I am pretty confident that in 20 years this business will be earning more, paying more in dividends and probably be more valuable as well.

      Good luck!

      DGI

      Delete
  2. DGI,

    Great chart there! Really shows that one year's increase doesn't really have much to do with the following year's increase. One should instead be focusing on the long-term trends. However, with that being said I was also disappointed with the latest dividend raise. Let's hope they still have a reasonable average over the next 10 years.

    Best wishes!

    ReplyDelete
    Replies
    1. Jason,

      Thank you for stopping by. I am going to keep holding onto Clorox, as long as the dividend is at least maintained. I always approach companies I invest in with the mentality of the long-term patient holder for the next 20 years. I think Clorox will be around in 2 decades, and paying more in dividends. However, they need to focus on improving margins and increasing profits.

      Cheers!

      DGI

      Delete
  3. The dividend increase was greater than the rate of inflation for 2013, which was 1.5%. I agree with your other concerns, but reinitiated a small (1% of portfolio) position in CLX recently. If the price drops, and the company's fundamentals don't change, I will buy more. Thanks for all the work that you do to keep us informed.

    ReplyDelete
    Replies
    1. Good luck with CLX Keith. I unfortunately have higher expectations for dividend growth from companies that yield 3%..

      Delete
  4. What do you think about WMTs last dividend increase? Disappointing?

    ReplyDelete
    Replies
    1. It was disappointing. But the lessons from this post apply as well.

      Delete

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