The name Clorox (160 1.61%) is beyond well known; it is iconic and practically synonymous with bleach. However, the company has grown well beyond this category.
That’s good news, but Clorox still faces the decline in enhanced cleaning driven by the pandemic, a negative trend compounded by runaway inflation. This is why the stock has fallen around 36% since the start of 2020.
An attractive value
The consumer staples giant is currently offering investors a generous yield of around 3.2%. That’s toward the top of the company’s historic dividend yield range. The company, in particular, has increased its dividend every year for more than 45 consecutive years, making it a dividend aristocrat. Put it all together, and it looks like Clorox stock has gone on sale.
Image source: Getty Images.
This is actually not unreasonable, however, for two reasons.
First, the 2020 peak coincided with a spike in demand for cleaning products. Given that Clorox makes such products, investors may have become a bit irrational in their desire to own it when COVID-19 was new. The world has, on the whole, learned to cope with the virus since then, and demand for cleaning products has predictably declined.
Even Clorox expected this to happen, so management opted to use contracted suppliers to handle the huge spike in demand instead of building new factories. As demand waned, Clorox terminated those contracts. However, sales of the company’s cleaning products are still not very good.
On top of that, inflation raged. This drives up Clorox’s costs for everything from ingredients to labor to transportation. It’s trying to pass that higher cost on to consumers, but as is often the case in the consumer products industry, there’s a time lag that drives margins down in the short term.
Put those two facts together, and Clorox has both declining sales and declining margins. No wonder investors are in a negative mood.
I’m working on it
Clorox is not unaware of the headwinds it faces. As noted above, it was ahead of the cleaning demand curve. And it pushes through price increases. It will just take time for the company to rebuild its margins.
Investors focused on the short term simply aren’t willing to wait for this iconic company to get back on track. For investors thinking in decades, however, the historically high yield should probably be viewed as a buying opportunity.
What’s remarkable is that Clorox is a much more diverse company than its name suggests. Yes, he owns his eponymous brand, and this brand is very important. But it also has Kingsford charcoal, Hidden Valley plasters, Burt’s Bees lip balm, Fresh Step cat litter, Brita water filters and Glad plastic bags, among others. Clorox is a powerful brand with the reach and scale to be an essential partner for retailers, using advertising and innovation to drive in-store traffic.
The weakness of one product category, while important, will not upset the entire company. And most of these products are budget items that are purchased regularly, so there’s some sticking power that should see the company through better days. When you step back and look at the bigger picture, it seems more like a recovery in activity is just a matter of time, even though investors are pricing the stock as if it won’t be able to. rebuild its currently depressed margins to more historic standards.
Arbitration of time
Wall Street is impatient, which puts a lot of pressure on professional investors. This is ideal for small investors who don’t have to ensure their quarterly performance is at the top of the pack. Simply put, you can invest in a disgraced name like Clorox and sit back, happily reaping big dividends, until management figures out how to fix the near-term issues that are angering Wall Street.
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