Utilizing the a SWOT analysis, we were able to analyze how safe Clorox's dividend is. Below is an in-depth look at Clorox's financials and business model.
Clorox's payout ratio is a strong signal that its commitment to dividends will be honored while pursuing new business endeavors.
Past acquisitions show that Clorox is persistent in adopting consumer megatrends and capitalizing off them
Earnings per share and free cash flow have been growing in tandem over the past several years, creating a very strong future.
Clorox is a leading provider in household consumer goods accounting for their products to be in 9 out of 10 U.S. households. The company sells products through mass retail outlets, e-commerce, and many other online distributors. The Clorox company operates four segments: Cleaning, Household, Lifestyle, and International. Their lineup of products control 80% the market in their respective categories, allowing Clorox to grow to over $6.2 Billion in revenue (as of FY2019). Some of their popular brands are Glad, Clorox, Hidden Value, and Brita Water Filtration.
With over 60 household brands, Clorox captured the COVID-19 buying phenomenon. Cleaning supplies, especially wipes and disinfectants, saw staggering increases in demand, which were capitalized on by Clorox. Clorox has robust name recognition in all legs of the American society.
Research and development have been a big part of driving more growth while reducing costs. Clorox wipes for example have vastly expanded the number of scents they offer, allowing them to expand their target audience. To reduce global waste and provide a more durable, lasting product, Clorox developed new production methods that reduce plastic waste by more than 20 million pounds annually. Strong brand name recognition, combined with cost-effective production methods, allows Clorox to capture a significant market share of household necessities in the North American market.
Environmental waste reduction has been a significant target area for Clorox as it aims to reduce costs in its operations. Over the past seven years, Clorox pledged to only work with suppliers that, by 2020, will have a 0 waste facility, as of 2020 13 of their sites have achieved this goal. In order to be more eco-friendly and design better products Clorox reduced their water consumption by 21% and its energy consumption by 18%2. Climate change is an ongoing global issue that is set to drastically change supply chains across the globe in the coming years. Clorox, in the past few years, has been able to minimize the future damage of global warming by introducing eco-friendly production methods in every sector of its business.
Clorox operates and sells products in 25 countries. The country that makes up for a majority of their sales in the United States. Since the U.S. is the only country in which Clorox has captured a majority of an average household's cleaning expenditure budget, the company is very volatile. When it comes to its net sales, Clorox is reliant on five of their principal consumers. Walmart, Costco and a few other big-name stores are the primary revenue stream for 45% of its net sales. Due to a very concentrated revenue stream, Clorox has to compete with their customers as many of these big-box stores are starting to introduce their own products that compete with Clorox.
The US is one of the supreme consumers for Clorox's products; its concentrated revenue stream makes it susceptible to significant changes in revenue by both the retail consumer and corporations.
With a surge in demand for disinfectant and cleaning supplies, Clorox's business is ready to tackle the shortage of supplies. As states open back up, and companies are slowly reopening across the United States, the CDC has implemented strict guidelines on how shops need to operate and disinfect their surfaces. Demand for disinfectants is still on the rise, especially Clorox branded cleaning items. This void can be quickly filled by Clorox and its subsidiaries, as they already control 80% of the market share for cleaning supplies. By the end of the fiscal year, hand sanitizer, sanitizing wipes, and many other cleaning products will see steady growth in demand due to more states opening up.
E-commerce sales have been surging since the beginning of the year. Since 2014, Clorox has been growing their e-commerce sales channel from 2% up to 8% of total sales in 2019. Acquisitions such as Burt Bees Bees allowed Clorox to enter new territory that appeals to more modern consumer spending habits. Since its acquisition, Clorox has been steadily growing their market share in natural beauty products.
Demand for cleaning products has seen a worldwide increase, forcing Clorox to aggressively increase its presence in Europe, China, and India. Many of these emerging markets are adopting a new way of living, which includes lots of sanitizing. Implementing its cleaning products across the globe, Clorox, in the future, will be able to shift its investments in the International sector to more profitable household products that are eco-friendly and reduce the impact of foreign headwinds.
Global supply chains and commodity prices have been on the rise since COVID-19. Clorox, in its plethora of products, utilizes only a handful of suppliers for its natural resources. Resin is used in a majority of Clorox's products, mainly in its Glad trash bags. Over the past several months, resin prices have been steadily rising as there is a strong demand from processors and other industrial institutions. With its dependency on a few natural resources, price fluctuations could cut into Clorox's profits in the upcoming quarters.
Consumer behavior is changing as the ambivalence of the financial market looms over people. Job losses are at an all-time high, with more than 35 million Americans being unemployed. As disposable income decreases, and prices of Clorox products rise consumers may purchase the cheaper alternatives to Clorox's products. US households possess the highest brand loyalty to Clorox; if this loyalty fades, we could see a significant shift in brand loyalty that would come at a premium cost for Clorox.
Revenue growth has been steady for Clorox. Projects like the IGNITE, an initiative to maximize economic profit sustainably, have shown to be a positive impact on company performance as it strives to bring more eco-friendly methods into its production.
Cost savings is an area that has been very important in the IGNITE initiative and continues to be as Clorox is setting goals for the next ten years. Since 2014 Clorox has been able to reduce costs by a total of $688 million. Clorox reduced costs by $122 million in 2019 alone and continues to innovate its production methods to reduce costs further.
Since 1998 Clorox acquired four brands that brought significant growth to the company. One of the first acquisitions was in 1998 with the purchase of First Brands. Clorox bought First Brands for $1.6 billion, adding a plethora of products to their portfolio such as; Glad trash bags, Scoop Away and Handi-Wipes. This was the first acquisition that took Clorox from an ordinary boring bleach company to an industry leader in cleaning products. In 2007 Clorox diversified its portfolio by purchasing Burt's Bees, a leader in natural beauty products. Clorox was able to buy Burt's Bees for $925 million, which permitted Clorox to add the 150 products Burt's Bees was selling to its portfolio. This acquisition marked a vital role in Clorox's path as it entered a market that was growing at about 9% annually. Obtaining a company that was known for its natural beauty products was a step in the right direction as Clorox aimed to become a recognizable brand in all the consumer mega-trends.
The next two acquisitions came in light of the new health trends such as gut health, plant-based vitamins and wellness beverages that are emerging in the United States. Renew Life specialized in digestive supplements, a market growing at 7% annually. Clorox was able to acquire Renew Life for $290 million in cash. Renew Life's sales and market concentration aligned perfectly with the future of Clorox.
Recently, Clorox acquired Nutranext, a company that specializes in multivitamins and beauty supplements. With a purchase price of $700 million, Clorox was able to gain control of some of the most popular multivitamins on the market. Nutranext's sales in 2017 were close to $200 million as they quickly expanded into e-commerce. Clorox once again was able to enter an emerging market that benefited communities across the globe.
Throughout its history, Clorox has been acquiring companies that align with consumer megatrends and its future vision. Starting from a bleach company, through acquisition, it has been able to add hundreds of products to its portfolios. Capturing emerging markets and consumer taste has been the fuel for Clorox. Once acquired, Clorox improves every product and launches aggressive marketing campaigns to appeal to a wide range of users. Although organic growth is not the main drive, smart acquisitions allow Clorox to succeed and fare exceptionally well in any economic condition.
Long-Term debt seems to be fluctuating over the years. Several acquisitions in the past few years have bumped up the deficit; fortunately, these acquisitions were performed in emerging markets that can give Clorox a good return on investment. With no significant fluctuations and the buying surge experienced by COVID-19, Clorox is in a strong market position making it quite risk-averse for the retail investor.
Debt to Equity ratio is a company's metric that measures the degree to which a company is financing its operation through debt or their own funds. Clorox, in 2012 was heavily indebted and ran most of its operations with borrowed money. Still, as Clorox adapted acquisitions and changing consumer habits, we see a steep decline in the ratio. Since 2017, Clorox has been able to keep its debts at shallow levels. With interest rates being very low, it does make sense for companies to borrow when capital easily attainable. Even with historic lows in interest rates, we can see that Clorox is very well positioned as a safe company.
Earnings per share is a commonly used metric in the financial world; it measures how much revenue the company makes for each share of its stock. Since 2012 Clorox has been on an uptrend on EPS. This is an excellent indicator that shows Clorox is reaching the goals it set out for itself. The IGNITE program, coupled with its operations reduction costs, has shown year after year how effective it has been. Dedication to entering newfound emerging markets has paid off in the long term. With hundreds of products ranging from natural beauty to bleach, Clorox is set to capture all the consumer megatrends and profit from them, which historically it has shown to do quite well.
All the sub-segments of Clorox since 2012 have been increasing their revenue streams. The risk that Clorox took in acquiring four major companies is paying off. Free cash flow refers to the amount of cash that is available for distribution to support ongoing operations or that could be given to stakeholders in the forms of dividend payments. Year after year, we see the free cash flow increase at varying rates. Historically we can look and see that Clorox has increased its dividend yearly even when they saw a slight slump such as the 2015-2016 year. Clorox is set up to be able to cover dividend payments to investors, a pact that won't be broken anytime soon.
So far, Clorox has powerful fundamentals to indicate that their future is safe, and investors will get their dividend payments. 2020 has been a rough year for many companies; dividend payments were halted or decreased all across the board. Even with the current state of affairs, Clorox increased its dividend. Quarter one and quarter two of 2020 Clorox declared a quarterly dividend of $1.06. In quarter three, which is often the time they announce dividend raises, they increased their quarterly dividend to $1.11. Strong fundamentals c, combined with a detailed history, shows that Clorox's dividend is safe for the retail investor.
A payout ratio is used to report how much of the earnings are used to pay a company's dividend. Clorox's payout ratio is currently 30.08%. Typically, a payout ratio of 30-50% is considered safe. Dividend aristocrats have an average of around 50%. Clorox's payout ratio is deemed to be in the safe space, it allows it to uphold their dividend pact with investors gives them the ability to use the rest of its earnings for stock buybacks or expansions. In the past, we have seen the importance of acquisitions; Clorox is exceptionally balanced between the investor's interest and business growth.
Clorox has demonstrated that its future business growth is focused on consumer megatrends. We saw the company going from an ordinary bleach company to having an extensive portfolio that is diversified in many sectors. Since COVID-19 has created new rules for our society, Clorox is in a high market position to provide cleaning supplies to every business. International growth is a market area that Clorox is expanding in. Overall, Clorox is a phenomenal company that has a very secure dividend and will uphold its unspoken pact with retail investors.