Stock Analysis: Clorox Co. (CLX)

Posted by D4L | Wednesday, December 17, 2008 | | 10 comments »

Linked here is a PDF copy of my detailed analysis of Clorox Co. (CLX) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Clorox Company is a manufacturer and marketer of consumer products. The Company markets brand names, including Clorox bleach, Armor All, STP, Fresh Step/Scoop Away, Kingsford, Hidden Valley, KC Masterpiece, Brita , Glad, etc.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
CLX is trading at a discount to 1.) and 3.) above. Since CLX's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, CLX is trading at a slight premium. CLX earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
CLX earned two Stars in this section for 3.) and 4.) above. CLX has paid a cash dividend to shareholders every year since 1968 and has increased its dividend payments for 31 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
CLX earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,183 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as CLX has. If CLX grows its dividend at 8.5% per year, it will take 7 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: CLX is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. CLX has stable demand for its household and personal care products, which is generally not affected by changes in the economy. The company has demonstrated a good level of product innovation, which in turn strengthens the company's pricing power and competitive stance. Risks include increased competition and promotional
activity, poor acceptance of new products, unfavorable foreign exchange and challenges associated with implementing an ERP system.


Conclusion: CLX earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks CLX as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $53.62 before CLX's NPV MMA Differential to hit the $3,000 that I like to see. At that price the stock would yield 3.21%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate
the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 7.6%. This dividend growth rate is below the 8.5% used in this analysis.

CLX is a stock that has been on my watch list for quite some time. With last week's decline, I was finally able to initiate a position in CLX below my $52.69 Buy Below price.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in CLX (1.4% of my Income Portfolio) .

What are your thoughts on CLX?


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10 comments

  1. Nurseb911 // December 17, 2008 at 9:07 AM

    Thanks or the analysis D4L.

    I just made a comment about the company yesterday on your previous post & here is a stock analysis in my google reader right away in the morning.

    That's what I call customer SERVICE! (haha)

  2. Dividends4Life // December 17, 2008 at 12:30 PM

    Nurseb911: We're here to serve! :)

    Best Wishes,
    D4L

  3. Anonymous // December 18, 2008 at 3:16 PM

    With all due respect, your analysis doesn't spend any time actually examining the fundamental business (competition, competitive advantages, management, revenue mix, business trends, etc.).

    Don't you think your analysis is a bit, shall we say, light?

  4. Dividends4Life // December 18, 2008 at 3:58 PM

    Anon: With all due respect to you, the analysis is clearly described in the disclaimer as "quantitative" and "mechanically calculated". In addition, it is noted that before buying or selling any stock you should do your own research (qualitative) and reach your own conclusion.

    There is such a high degree of subjectivity in a qualitative analysis, it is best left to individual.

    Best Wishes,
    D4L

  5. Jae Jun // December 19, 2008 at 1:32 AM

    A company that I like and use often. Just waiting for it to come down to my buy price but this is a stubborn fella.

  6. bw // December 28, 2008 at 1:36 PM

    I love your style of analysis but I do wonder if you are being too rigid and arbitrary. For example, if a company grows a dividend at 14% or 1% it is treated the same way. Wouldn't a fuzzy logic approach be more useful.
    Also your use of a long term MMA average denies the fact that you are making a current decision for investment. If interest rates are going down and expected to continue ,your money has no real option , presently to invest at that rate. Wouldn't a more useful comparison be a 3 or 5 year CD that is presently available?
    One more thing is the demand for a 15% growth of dividends to produce a doubling in 5 years of your dividend. How many stocks can pass this test? I don't have any idea.
    Have you tried this test procedure out with historical data with a statistically sufficient amount of companies to see if it threw out too many good stocks or did actually weed out dogs?
    Like I said , I love what you are doing ,but a bit of dialog about assumptions and conclusions might be useful.

  7. Dividends4Life // December 28, 2008 at 2:48 PM

    BW: I am not sure I completely follow your logic? Specifically what are you suggesting with fuzzy logic?

    I am a buy and hold "forever" investor. My horizon (or "forever") is 20 years. If interest rates are dropping and expected to continue to do so, it should be embedded in the 20 year Fed rate, which I think that it is since that rate continues to decline. A 3 or 5 year CD assumes my time horizon is 3 or 5 years, which is not the case for me.

    I probably wasn't clear, but I don't require a 15% dividend growth rate. A stock just earns a bonus Star if it has done that.

    Unfortunately, I don't have the data or time to to perform a statistically relevant back testing - I am having to adjust on the fly.

    Thanks for the comments!

    Best Wishes,
    D4L

  8. bw // December 28, 2008 at 4:17 PM

    I used to fool around with primitive artificial intelligence programs that did a very similar analysis to what you do with your screen. So if we were looking for 15% dividend growth but we discover a stock with a 10% increase,we could give it a 2 out of 3 or a 3 out of 5 rather than just a 1 or 0. It might add something to your analysis and at least quantify the work you have done rather than just discard the efforts you have made. Just a thought.

    I have seen the buy and hold forever of dividend stocks work very well in real time and I like the common sense of it as well as your approach to quantify the analysis.

    I offered the 3 or 5 year CD as a concept because I was imagining going into the market on Monday, for example, with $5000. I could put it under the mattress or in a MM , CD, bond or stock. Since you are looking for a risk free return comparison , I thought a longer term CD might give you a real investment comparison because of the locked in rate of return for a specific period of time. It might also make sense in that your analysis of dividends focuses primarily on the last 10 years of data and projecting that forward 3 or 5 years is a pretty conservative assumption. Three or five years is long enough to allow for the vicissitudes of market swings but not too distant for projecting possible returns from your stock investment. It allow a chance for the stock to do what you hope for and a reasonable time frame to reevaluate the initial decision.
    As I said , I love what you are doing, and just felt like offering some , hopefully useful, food for thought.

  9. bw // December 28, 2008 at 10:33 PM

    D4L
    I just saw your recent email and see that you are monitoring the 20 year Treasury as an objective interest rate as well as your MM calculation. That solves in some way my desire to have an objective number to compare.

  10. Dividends4Life // December 29, 2008 at 8:29 AM

    BW: I started monitoring the 20 Treasury year rate when I felt the MMA rates were not indicative of what would occur over the next 20 years. Ironically, at the time I felt the 20 year rate should be higher than the MMA rate - now the 20 year Treasury is less than the MMA rate that I am using.

    Best Wishes,
    D4L

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