A Low Leverage Company Worth Looking Into
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People and companies alike have more flexibility when they don’t have to rely on outside financing, such as debt or selling stock. Companies with less debt don’t have to pay as much interest expense, which can lower net earnings and cash flows. As I have been researching companies for my blogs over the past four months I have found very few thus far that have met my personal criteria of total debt to equity of less than 85%. Church and Dwight (NYSE: CHD) has met that criteria. With a total debt to equity ratio of 54%, I think the company will continue to outperform fundamentally over the long-term and is worth being on any value investor’s watch list.
Church and Dwight is the owner of the famous Arm and Hammer brand. The company was founded in 1846 and makes baking soda, liquid detergent, automatic toothbrushes, lip pain relief medicine, and contraceptives. The fundamentals of this company are excellent. Sales for the most recent quarter (03/31/2012) increased 8% over the same quarter last year, driven by growth in liquid detergents and kitty litter sales on the domestic side and strong international sales growth. Operating margins improved from 16% to 18%, from 2009 to 2011. Free cash flow did decline in 2011 from $373 million to $361 million due to rising commodity costs, but this was an improvement over the $295 million in 2010. The dividend capability is excellent as well, because it only paid 27% of its free cash flow out in dividends.
Church and Dwight’s smaller size, narrow brand focus, and low international penetration make this company more nimble and give it greater room to grow. Its biggest competitors, Clorox (NYSE: CLX) and Proctor and Gamble (NYSE: PG), are bigger companies with more cash and resources at their disposal. Proctor and Gamble sits on roughly $4 billion in cash, or 17 times what Church and Dwight has. Proctor and Gamble also has highly recognizable brands such as Tide, Charmin and Bounty. Clorox has its famous bleach and tablets, as well. However, Proctor and Gamble and Clorox have more products to manage. Proctor and Gamble lists 24 brands that have earnings of more than a billion dollars in revenue, whereas Church and Dwight has only eight power brands to focus on. Church and Dwight’s international expansion has just begun, with the consumer international sales segment comprising 18% of revenue as of the most recent quarter. This gives them the combination of being experienced and small.
Better fundamentals have translated into better results for Church and Dwight. According to Yahoo! Finance Charts, Church and Dwight has increased 137% over the last five years. Proctor and Gamble has a total debt to equity ratio of 104% (mrq) and its share price has increased only 4% over the last five years. Clorox has a negative stockholder’s equity, which makes the debt to equity ratio incalculable, and has increased 15% over the last 5 years. Profitability and cash flows at Proctor and Gamble are declining. Clorox cash flow and profitability are variable.
Weighing the Risks
Church and Dwight is trading at a p/e ratio of 26, which is expensive. Political risk is going to rise due toan increasing global presence. Fundamental risk is lower than its peers as outlined above. Patiently waiting for a cheaper price is warranted here. There has also been a recall on their spin brushes because of overheating.
I would suggest doing your own research before following my or anybody else’s advice. With Church and Dwight’s superior fundamentals, brand recognition and relatively nimble size, I think it will be worth the wait for a better price.
stockdissector has positions in Proctor and Gamble mentioned above. The Motley Fool owns shares of The Clorox Company. Motley Fool newsletter services recommend The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.