Wednesday, June 16, 2021

Church & Dwight (CHD) Dividend Stock Analysis

Church & Dwight Co., Inc. (CHD) develops, manufactures, and markets household, personal care, and specialty products. The company operates through three segments: Consumer Domestic, Consumer International, and the Specialty Products Division. 

The company is a dividend achiever, which has increased distributions for 24 years in a row, starting in 1996.

Back in February, the Board of Directors approved a 5.21% increase in the quarterly dividend to 25.25 cents/share. During the past decade, the company has managed to increase dividends at an annualized rate of 20%. The five-year dividend growth rate is 7.50% annualized. 

Over the past decade, this dividend growth stock has delivered an annualized total return of 17.63% to its shareholders.

Between 2010 and 2020, Church & Dwight managed to increase earnings from 94 cents/share to $3.12/share.

Church & Dwight is expected to earn $3.04/share in 2021 and $3.27/share in 2022.

The company has several important brands, but has mostly been able to grow through acquisitions. Other than Arm & Hammer, most of its biggest brands have been acquired over the past 20 years. It is a smaller player, which increases the chances that some of the big players takes it over.

The demand for its products is fairly stable and relatively immune from the economic cycle. Future growth will be a function of new product development, maintaining cost, improving efficiencies, expanding internationally and strategic acquisitions. Increased focus on marketing should help in retaining and attracting more customers to buy its products on a repeatable basis.

The goal of Church & Dwight is to grow revenues at 3%/year, growing gross margins by a quarter of a percent, reducing overhead by a quarter of a percent. This comes out to organic earnings growth of 8%/year.

Church & Dwight has a well balanced portfolio of household and personal care products. Household accounts for close to 47% of sales, personal care accounts for 45% of sales, while the remainder comes from Specialty Products. 

The company can grow sales and earnings through strategic acquisitions, expanding its international sales and creating new products. Acquisitions can help earnings per share by generating cost efficiencies and increasing scale. On the other hand, acquisitions can be difficult and costly to integrate, particularly if corporate cultures do not align well.

Church & Dwight has managed to grow revenues through acquisitions over the past decade. More than 80% of sales come from 11 brands. These are dominant brands in their product category. The majority of those brands have been acquired since 2001.

International distribution is an opportunity for Church & Dwight, since the company generates less than 16% of sales from abroad. The risk with international distribution is increased promotional activity by larger and more established competitors, which may result in increased sales without a material increase.  There is a high level of organic growth international I the 6%/year range. The number of middle class consumers in Asia for example is expected to triple between 2009 and 2020 and then double from there to over 3 billion people by 2030.

Another risk is the fact that almost a quarter of sales come from Wal-Mart. Depending on a single entity for a quarter of sales is a risk, because you are likely to be pressured in order to maintain this distribution channel. Church & Dwight is also at risk from generic brands, which Wal-Mart could push harder than the branded products.

Church & Dwight is also working on increasing its online sales, With a large number of consumers spending an increasing amount of time online, this is a great opportunity. On the other hand, it is difficult to sell directly online, without going through an online retailer which can offer the same type of pressures as a traditional retailer such as Wal-Mart.

Share buybacks have resulted in the decrease in diluted outstanding shares from 289 million in 2010 to 252 million in 2020. A history of consistent share repurchases is helpful, because it shows that the company is willing to help out long-term holders of stock with increased proportional share of earnings and the business over time. Over the past three years however, management has not repurchased any shares. In a way I support this decision, since the stock has not been cheap.

The dividend payout ratio has shot up from 16% in 2010 to 43.50% in 2015, before slowly leveling off at 30.77% in 2020. The increase in the payout ratio explains the rapid growth in dividends per share over the past decade, which was faster than earnings growth. In the past five years however, the rate of dividend growth has slowed down and is now slower than earnings growth. Longer term expectations for earnings and dividend growth are to be roughly in check, albeit the company does have some wiggle room to raise the dividend faster than earnings.

Currently, the company is not cheap at 25.80 times forward earnings and yields 1.30%. I like the earnings growth pattern, and believe that the business can continue growing its earnings over time.

These are the P/E ranges for Church & Dwight over the past decade:

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