Monday, May 7, 2018

Church & Dwight (CHD) Dividend Stocks 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 22 years in a row.

Back in February, the Board of Directors approved a 14% increase in the quarterly dividend to 21.75 cents/share.

Over the past decade, this dividend growth stock has delivered an annualized total return of 14.60% to its shareholders.

The company has managed to deliver a 12.40% average increase in annual EPS over the past decade. Church & Dwight is expected to earn $2.27 per share in 2018 and $2.44 per share in 2019. In comparison, the company earned $1.94/share in 2017. I came up with this amount after stripping out one-time adjustments largely related to the new tax law, as well as a few smaller auxiliary adjustments related to specific country business units.

Share buybacks have resulted in the decrease in diluted outstanding shares from 284 million in 2008 to 248 million in 2018. 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.

Church & Dwight has a well balanced portfolio of household and personal care products. Household accounts for 47% of sales, personal care accounts for 45% of sales, while the remaining 8% comes from Specialty Products. The company is targeting 3% organic sales growth for its products and 8% annual earnings per share growth.

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.The recent acquisition of Water Pik for $1.1 billion in cash was a change in that direction. Given that it was financed by debt at a low cost, this acquisition is expected to be accretive from the start.

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 24% 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, which account for 5% of revenues. 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.

The annual dividend payment has increased at a rate of 26% per year over the past decade, which is higher than the growth in EPS. This record was achieved through expansion of the dividend payout ratio/

A 26% growth in distributions translates into the dividend payment doubling every three years on average. I would expect future dividend growth to be closer to 10%/year over the next decade.

In the past decade, the dividend payout ratio increased from 13% in 2008 to a little under 39% in 2017. It seems that after reaching a target payout ratio of 40% in 2012, the company has largely stuck to maintaining a consistent payout ratio. This is why I believe that future dividend growth will be similar to long-term expected earnings growth over the next decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, the company is slightly overvalued at 20.90 times forward earnings and yields 1.80%. I like the earnings growth pattern, and believe that the business can continue growing its earnings over time. I would consider initiating a position in this dividend achiever on dips below $45/share. This is equivalent to a price below 20 times forward earnings

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