Invest in the Bare Necessities

Wes is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Companies that supply us with goods that we need operate in a very stable part of the economy. They are rarely in the news because there is typically no news to share. Unless there is a mass “staining” across the country, Clorox (NYSE: CLX) will continue to sell about the same amount of bleach.

That was easy

Staples (NASDAQ: SPLS) has strong business-to-business relationships and the third-strongest retail brand name on the Internet behind Amazon and Wal-Mart Stores (NYSE: WMT). Staples' Internet sales account for 42% of sales, and come with less overhead than the company's retail operations. This is why Staples has been able to outperform its peers. 

It has taken charges for closing physical stores, which contributed to a drop in sales of 2% in 1Q 2013 versus 1Q 2012. In 2013, Staples is looking to drive savings of over $150 million, while having net store closures of between 40 and 45 locations.

Staples was seeing customers shift from computers and business machines to tablets and traditional office and facility supplies. This was contributing to lower revenue, as the big-ticket items are shrinking in volume. Staples saw its operating margin come in at 7.3%. It pays out 35% of its earnings to support a dividend of 2.9%, the highest yield in its sector.

Staples’ management is expecting to generate more than $900 million in free cash flow in 2013, and will continue to repurchase stock. At the current rate, Staples’ will repurchase nearly 4% of its shares outstanding per year.

Throwing money away could be a good thing

Clorox has an extremely stable consumer-goods orientated lineup of products. What better business model can a company have than the Glad garbage bag? Purchase this product, and intend to throw it away; repeat.

Its flagship product, Clorox bleach, is an item that sells itself with a strong brand name. Regardless of the economic state of the nation, people will still be buying bleach. Clorox’s other products are also staples throughout the consumer world; its pet-products division has some of the most loyal consumers around.

Since 2003, Clorox’s worst year, it has produced an astounding $340 million in free cash flow. The company spends 59% of its earnings to support a 3.4% dividend yield. Clorox has a net profit margin of 10% and has increased its dividend an average of 13.2% over the past five years. In addition to the robust dividend growth, Clorox has reduced its share count by 7.4% over the past four years, giving existing shareholders a greater share of its earnings.

This past year, Clorox saw 10% growth in its disinfecting products as it continues its expansion overseas. The company expects mild revenue growth in the overall portfolio of 3% to 5% worldwide, with an increase in margins of 0.2% to 0.5% next year. Since Clorox operates in a mature market place, its growth is driven mostly by overseas expansion and this growth target is both appropriate and realistic. Clorox's shareholders can expect to be rewarded over the long term.

Always low prices, always

Wal-Mart Stores is the world’s largest retailer. It boasts on the fact that nearly 60% of Americans will shop at one of its stores at least once a month. When comparing consumer staples, food is the most basic of necessities. Wal-Mart is the nation's largest grocer, and makes a small profit on every transaction in its grocery business. 

People buy their groceries in stores, not via the Internet. Wal-Mart’s massive logistics and store networks allowed the company to leverage this fact. Last year, Wal-Mart’s net sales increased 5% to $466 billion and the company returned $13 billion to shareholders through dividends and share repurchases.

Wal-Mart has a net profit margin of 3.8% in an industry with an average of 0.4%. Wal-Mart pays out nearly 60% of its earnings to support its dividend of 2.4%. Even if Wal-Mart’s sales slow, there is plenty of room for earnings to fall before the dividend becomes threatened.

Foolish bottom line

Clorox has a squeaky clean balance sheet, is slowly reducing share count and produces products that will sell no matter the state of the economy. Staples has a strong business-to-business organization, and a great online retail asset. However, this company will continue to be weighed down by its brick-and-mortar stores, and a shift away from PCs. Wal-Mart is considered the king of retail, and its giant move into groceries will continue to provide a moat for this giant.

Clorox and Wal-Mart will provide stable growth for conservative investors. If Staples can leverage its online retail sales and reduce the reliance on its physical stores, it could be a great growth opportunity.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

Wes Patoka has no position in any stocks mentioned. The Motley Fool owns shares of Staples. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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