The Ultimate Buy and Forget about Company

By Ryan Guenette - August 10, 2012 | Tickers: CL, KMB, PG, CLX, UN | 0 Comments

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Watching the market on a daily basis is unsettling, nerve-wracking, and honestly, does absolutely nothing for the long-term investor. As an investor with a spectrum looking out 10 to 20 years, I could not care less about what Draghi reportedly said, or about how Ben Bernanke put the state of the United States economy. The economy is not doing well, unemployment is above 8%, and no one needs to quote Bernanke to realize this. With all the short-term volatility in the markets due to European recession fears, and a more overall slowdown in the global economy, wouldn’t it be nice to hold a company that investors could just buy and forget about.

The Clorox Co. (NYSE: CLX) is a highly diversified consumer non-cyclical products company that probably has at least one product inside of nearly every American household. Their vast portfolio of products consists of cleaning, household, lifestyle, and international products. Clorox’s vast array of products is shown below, as well as how much revenue each product produced in 2011.

Over the past 10 years, Clorox has rallied 87.72%, all the while paying out a consistent dividend. So why is Clorox the ultimate buy and forget about company?

Strong Fundamentals

In 2010, Clorox reported earnings per share of $4.24. In 2015, the average consensus believes Clorox is set to report earnings per share of $5.02. That represents a 18.40% increase in earnings per share over 5 years. Based on these statistics, Clorox’s compound annual growth rate (CAGR) is 3.44%. Clorox’s growth is not spectacular, as nearly 90% of their brands rank first or second in market share in their respective categories, yet is stable and heading in the right direction. Clorox’s earnings growth is highly correlated to the global economic environment, and rises and falls with the upticks and downturns, but rebounds faster than other companies’ earnings, as after all, people still need to do the laundry.

Currently, Clorox pays out an annual dividend of $2.56, which at current prices, has Clorox’s dividend yielding 3.61%. Clorox’s annual dividend is elevated from 2011’s annual dividend of $2.40, and is strongly anticipated to further expand into the future. By 2015, the Street expects Clorox's annual dividend to reach $3.00, which at current prices, would be a 4.2% yield. Based on these projections, Clorox’s dividend is anticipated to grow 17.19% over just 3 short years. All in all, Clorox’s earnings are growing at a pace that is stable and voluminous enough to support substantial growth in its dividend.

The chart below displays Clorox’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Sustainability and Growth Strategy

The main reason Clorox is the ultimate buy and forget about company is that the majority of its products are necessities, required in even the darkest of downturns. Even in recessions, people are still going to clean their houses, do the laundry, and buy trash bags. Clorox may not grow at a highly accelerated pace, but will be able to sustain its earnings.

Where Clorox will find growth is through capitalizing on the ever changing needs of the global consumer, as well as obtaining growth through acquisitions. Firstly, Clorox is determined to take advantage of the “megatrends” it recognizes in the global market. They have classified these megatrends as health and wellness, sustainability, multiculturalism, and value. They plan to capitalize on these trends by innovating their current products, as well as creating new ones. The second part of Clorox’s growth strategy is using its massive pile of cash to acquire other high-growth products. Most recently, Clorox acquired Bert’s Bees, a leader in the natural personal care category, for an incredible $925 million in cash. In conclusion, Clorox’s growth strategy is a two-part program, capitalizing on megatrends and finding growth through acquisitions.  

Sovereign of a Sector

Compared to some of Clorox’s most prominent competitors, such as Procter & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL), Kimberly-Clark (NYSE: KMB), and Unilever N.V. (NYSE: UN), Clorox compares relatively favorably.

In terms of growth, Clorox is decent, while Unilever leads the pack. Clorox possesses the largest dividend, while Unilever possesses the fastest growing dividend. In the fundamental ratio comparison, all companies trade relatively in the same range. When growth is taken into account, Clorox appears to be trading at a premium, while Unilever trades at an ideal price. In the net profit margin comparison, Colgate stands out to the upside, while Clorox stands out to the downside.

The Foolish Bottom Line

Clorox is not a name to participate in if you are a trader. It's very steady, moving incremental amounts from day to day. If you are a long-term investor, willing to sit tight for years, than Clorox is a perfect name to own. Clorox produces stable and consistent earnings growth, pumps out a 3.61% dividend, and has a clear-cut growth strategy. The Foolish bottom line is Clorox is a company that produces necessities, which in turn will help it ride out economic downturns better than other companies, and also pays out a decent dividend, making Clorox the ultimate buy and forget about company.        

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