Look around my house right now and you’re bound to see many canisters of Clorox (NYSE:CLX) disinfectant wipes lying around ready to kill on a moment’s notice. The coronavirus has certainly put Clorox stock on the map.
Here’s why you ought to hold CLX beyond the outbreak.
Lots of Tailwinds at the Moment
Yahoo Finance’s Brian Sozzi recently discussed three reasons why UBS analyst Steven Strycula thinks Clorox stock is a buy. The first is a no-brainer: Clorox bleach and disinfectant wipes are in high demand.
“Based on conversations with retail buyers, we estimate COVID-19 related demand could boost baseline disinfectant category trends by 3-5x in the next few months as retailers work to rebuild inventory and stay in stock,” Strycula stated.
It’s one thing for Clorox to expect increased demand for its products. However, other companies will benefit from the need for these items, including Reckitt Benckiser (OTCMKTS:RBGLY), who own the Lysol brand, and GOJO Industries, the privately-held maker of Purell hand sanitizer.
Given GOJO relies almost exclusively on the Purell brand, I would say it probably has more to gain from the coronavirus than Clorox. That said, the company’s bleach and disinfectant wipes account for approximately 25% of its sales. Perhaps even more important, its Cleaning segment, which includes these products as well as other brands including Pine-Sol and Green Works, generates 53% of Clorox’s overall earnings before income taxes.
Any increase to this segment’s sales beyond an ordinary bump is money in the bank for the company.
A second point the analyst points out is that all the publicity these brands are getting means it doesn’t have to advertise at the moment. People are going into stores and hoarding the stuff. That’ll drive short-term increases in its operating margin, but it likely won’t be sustainable in the long run.
But still, a penny saved is a penny earned.
Lastly, resin costs represent 15% of Clorox’s cost of goods. With oil prices in a free fall, its margins should rise in the short-term. This one, I believe, ought to be more sustainable down the road because of the Saudis desire to own the global oil market, which should keep oil prices low for the next 2-3 years or longer.
Year to date through March 23, it is up 11.5% (including dividends) compared to a 31.4% decline for the entire U.S. markets. So, Clorox shareholders are benefiting from the coronavirus.
How About Clorox Stock Over the Long Haul
In March 2017, I called Clorox stock one of the best stocks to buy for retirement. Ironically, I mentioned some of its other brands, such as Glad, Brita, and Burt’s Bees, but failed to mention its Clorox bleach products.
“Currently yielding 2.3%, Clorox’s five-year dividend growth rate is 7.1%; over the same period its earnings per share grew 14.3%, a key reason CLX stock has achieved a five-year total return of 9.6% through March 28, 229 basis points better than the S&P 500,” I wrote in 2017.
“You could not find a more consistent stock if you tried. Up 14.8% year to date, Clorox is working on a ninth year of positive returns out of the last 11; in 2008, Clorox had a total return of -12.1%, significantly better than the S&P 500 at -37%.”
Over the three-year, five-year, 10-year, and 15-year periods, CLX has outperformed the U.S. markets on an annualized basis. Currently yielding 2.5% despite its impressive run in 2020, it is one of the best Dividend Aristocrats you can own.
As the UBS analyst suggests, Clorox’s stock isn’t cheap. Based on free cash flow of $780 million and an enterprise value of $24.3 billion, it has a free cash flow yield of 3.2%. Anything over 8% is considered a value play.
That said, if you want to sleep at night, it is one of the better stocks to own for the long haul. You won’t hit home runs, but you won’t strike out either. It really is the perfect stock for your retirement portfolio.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
