Clorox Drops the Ball on Dividend Growth

by Dividend Growth Investor | May 21, 2014 1:18 pm

Clorox (CLX[1]) makes consumer and professional products worldwide. Last week, the company increased quarterly dividends by 4.20% to 74 cents/share, marking the 37th consecutive annual dividend increase for this dividend champion[2]. It was a disappointing increase, however — much lower than what I am expecting. This is also the slowest dividend increase since 2006, when dividends were raised by 3.60% to 29 cents/share.

I still like the company, and will continue holding onto the stock I own, based on my original analysis of Clorox[3]. However, I will not be adding to the company in the near future.

The annual dividend growth is lower than my 6% annual dividend growth target. In addition, the stock is trading at the top of my acceptable valuation range[4] of 20 times earnings, although the yield at 3.20% is pretty decent, and sustainable for the time being. The company earned $4.32/share in 2013, and is expected to earn $4.33/share in 2014 and $4.50/share in 2015.

I also do not like the fact that revenues have increased from $4.324 billion in 2004 to $5.623 billion in 2013, but total net income went from $549 million to $572 million over that period. Earnings per share went from $2.56 in 2004 to $4.30 in 2013, mainly due to massive share buybacks in 2005 and 2006. Those share buybacks[5] resulted in negative book values per share, which are scaring novice investors.

Many investors are thrown off by the supposed high debt levels for Clorox, but I am not seeing any reason for worry. The company could easily pay off all of its long-term debt within four years based on its free cash flow. (Of course, in the current low-yield environment, the incentive is to lock in those ridiculously low rates, not repay debt with cash that can deliver higher value to shareholders or by reinvesting in the business.)

The chart below teaches one important lesson for dividend growth investors. The lesson is that dividend growth rates can fluctuate over time, and are not going to be consistent every single year. It is important to understand this, in order to avoid having unreasonable expectations. It is also important to note that one should not panic and sell[6] because of one or two years where the dividend is not increased fast enough.

CLX Dividend Growth

Year-over-year dividend growth can be lumpy, yet the 10-year average growth could turn out to positively surprise investors. There were nine quarters between 2000 and 2002 and six quarters between 2003 and 2004 where dividend payments were unchanged. Despite this, annual dividend payments still increased every year during that period. Investors who panicked and sold because they didn’t like the freeze missed out on a dividend that almost tripled.

Full Disclosure: Long CLX

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