Clorox's Dividend - Squeaky Clean or Dirty Value Trap?

What's up everybody? GenX Dividend Investor here. In this episode, I'll look at why Clorox's dividend yield just climbed to a massive 6%ish. And I'll explain what went wrong, what's going right, and where I think things will go from here. And stick with me because later I'll show you some of its dividend history, which reveals a blind spot a lot of dividend investors have, and could apply to stocks you own right now. And if you like deep dives like this one, then please leave a comment and tell me which stock you'd like me to tackle next. Okay, so Clorax was actually a position I held for years before I was on YouTube and it did quite well. I mean, you can see how it outperformed the SP500 for decades starting in the '90s up until the pandemic. Unfortunately, I sold it shortly before CO hit and that's when the stock really shot up. I got out because I felt its growth was too slow. It was facing rising costs and tougher competition and it had made what I thought was a questionable acquisition. Plus, there are some other stocks I wanted to get into more, so I moved on. I missed the huge pandemic runup when its Clorox bleach, disinfecting wipes, and sprays became hot commodities around the world. They also own other brands you'd recognize, such as Glad Bags, Fresh Step Cat Litter, and Hidden Valley Ranch. All of which had strong growth as people stayed home. And they just bought Purel, but more on that in a bit. To this day, I'm still cool paying a premium for some of their products. And one of my favorites is Bert Bee's lip balm. You see, back in 2014, I went to the Consumer Electronics Show in Las Vegas for work, and my lips were starting to feel chapped from the dry desert air I wasn't used to. So, I stopped by the gift shop at the Wind to grab some chapstick, but they only had BS bees. I tried it and really loved how it felt, both immediately and over time. And since that day, I've used it literally every day, both morning and night. My point being, I'm willing to pay more for certain products I use if I really love them. Like I still prefer Glad trash bags more than Amazon's less expensive brand as the Glad ones hold up much better and almost never break open. Anyway, after the pandemic, Clorax stock fell as fast as it went up. So, for once, I got lucky getting out before it dropped. And as for why it fell, well, there was a massive drop in demand for cleaning products, and then coupled that with high inflation, a major cyber attack, and some costly internal system upgrades. And bottom line, the stock needed a cleanup in aisle 4. So, if you'd gotten into Clorox any time in the last 10 years, then you might not be very happy. I mean, over the last decade, Clorox has had a negative total return, even with dividends reinvested, as compared to a 330% return for the SP500. That's pretty dirty, especially when you go back to the spring of 2020 when most of us were stuck at home and a canister of Clorox wipes was about the hardest thing in America to find other than toilet paper. You'd walk into the store, head over to the cleaning aisle, and find a bare shelf with a little sign saying one per customer, assuming there were any left at all. I mean, people were posting pictures online when they scored some wipes, like they just won some big prize at the county fair. Honestly, I think a lot of people felt that way about the stock as well, because owning the company, whose products were flying off every shelf, seemed like the best and most obvious investment in the world. And I remember thinking, of course, the second I sell it, it takes off. Sure enough, Wall Street got swept up in the excitement and pushed the stock to nearly 240 bucks a share by August of 2020, which was more than 30 times earnings for a company that basically sells bleach, trash bags, and charcoal. Fast forward to today, and those same shares are now in the 80s, which means roughly 2/3 of that peak value has been wiped away. So, the big question is whether this is a broken company or a decent company that got wildly overpriced and has spent 6 years paying the bill for it. Personally, I think the answer is a bit of both. and understanding which parts are which could make a real difference for your portfolio. Like over the last year, Clorox delivered a total return of roughly negative - 26% with dividends reinvested while the SP500 was up around 19%. That's stinky. Its 5-year number is even uglier since you'd be down around 38% even after collecting dividends while the SP500 returned 92%. So, it's had a pretty painful stretch for a classic dividend stock, though at least its stiffies kept getting paid and even raised every year. But still, what the heck happened to a business that sells stuff people want to buy in all market conditions? Well, the first problem was that the pandemic boom pulled a ton of demand forward and everybody priced the stock as if we'd all keep sanitizing our shopping carts forever. Actually, that's not a great example cuz my wife and I still do that, but we're a little OCD. Anyway, the second problem was inflation, which squeezed its profits across the board. Since the cost of raw materials, packaging, and shipping shot up way faster than Clorox could raise its prices. Its gross margin, which is the profit left over after making the product, fell from around 45% to under 36% in just 2 years, and adjusted earnings plunged from 725 a share to about 410 in a single year. But then just as things were healing, hackers hit the company in August of 2023, which disrupted its ordering systems, forced it to process orders by hand, and left a lot of store shelves bare for weeks. Now, to their credit, management rebuilt margins back above 45% and got adjusted earnings all the way up to 772 a share in fiscal 2025. But that number was improved by a one-time quirk. And this is the part that confuses some folks. You see, Clorax was replacing the software that runs its whole business, which is called an ERP system, and retailers stocked up on about two extra weeks of product beforehand, just in case things went sideways. That added about 90 to earnings in fiscal 2025, but then it subtracted about 90 in fiscal 2026 as stores worked through all that extra inventory they had. All told, it was a nearly $180 swing in earnings per share, which made the year that ended up this past June look pretty ugly to me, with sales down 5% to 6.7 billion and adjusted earnings down 28% to 553 a share. That one time thing explains most of the drop, but we got to be real here because it doesn't explain everything. Organic sales fell 8% for the year, and about 7 1/2 points of that came from the inventory thing, which means the underlying business was still shrinking a bit. You can see it in the details as well since the household segment with Glad, Kingsford, and Cat Litter saw sales fall 11% and the lifestyle segment with Hidden Valley, Brida, and Birds Bees fell 14% while international was the lone bright spot with 5% growth. Gross margin also slid back to 42.3% and management is guiding for about 42% this year because they expect more than 200 million of cost inflation, which is roughly double what they'd see in a normal year. On top of that, shoppers are stretched right now, and a stretch shopper will often grab the store brand of bleach or trash bags or whatever if the name brand costs just a little bit more. That's one of the same value problems I talked about in my McDonald's video, where a company raises prices for years and then finds out its customers have a limit. Go figure. Now, here's where the Clorox story gets a bit riskier to me, because they had two big cash outlays right when their sales and margins were under pressure. First, their existing agreement required them to buy out Proctor and Gamble's stake in the GLAD business when the partnership expired, which cost 476 million and was the main reason operating cash flow dropped 38% to 612 million. Second, they bought the maker of Purel for over 2 billion in cash and they funded that deal mostly with borrowed money. I actually love both of those brands, but those acquisitions caused their total debt to roughly double from about 2.5 billion to around 5 billion in a single year, and interest expense is expected to jump from 130 million to about 210 million. Now, I like to play for the long term, so I think those deals could end up being fruitful, but it kind of reminds me of a family that already has a tight budget and then takes out a big loan to buy the house next door as a rental. It might turn out to be a brilliant move 10 years from now. But in the meantime, there's a lot less wiggle room if the roof starts leaking. And as if that weren't enough, their CEO announced back in May that she's stepping down for health reasons, and the board is still searching for her replacement. I wish her nothing but the best. And from an investing standpoint, it simply means we don't yet know who'll be steering the ship through this cleanup. Feel free to send them a note if you think a silly dividend YouTuber should be at the helm. Bottom line, the market is looking at soft sales, thinner margins, a stretched consumer who's more open to cheaper store brands, doubled the debt, and a leadership change. And that's why I think the stock has been bean down so badly. That all being said, I don't think this is a company that's headed for the dumpster. I mean, these are brands that sit in nearly every home in America and plenty more around the world, from the cleaning cabinet to the pantry to the backyard grill. And I know that every few days I scoop out our cat litter, I take out the trash, and my wife puts ranch on basically everything, no matter what the economy does. Heck, I'm actually looking at a bottle of Purel on my computer desk right now since I'm just getting over a cold. And we're pretty careful about sanitizing stuff to keep the family healthy. So, the acquisition looks like a sensible fit to me since Purel is the number one hand sanitizer brand. And Gojo, the business behind it, brings in close to 800 million a year in sales and had grown around 5% annually over the previous 3 years. A big chunk of that business comes from places like hospitals, schools, and offices, which tend to keep refilling their dispensers year after year. And with Purel in the mix, Clorax says its global health and hygiene portfolio now makes up more than half of its sales, and management expects at least 50 million in cost savings from combining the two. I've often found cost savings estimates like that to be overly optimistic, but time will tell if Clorax actually delivers. And their 5-year, roughly 580 million technology overhaul is also finished. So that spending goes away and the efficiency benefits should start showing up. Plus for fiscal 2027, management is guiding for sales to grow 13 to 14% mostly because of Purel with adjusted earnings between 570 and 6 bucks a share. That would be earnings growth of 3% to 8% which isn't super exciting, but it's definitely a good step in the right direction. Still, I should point out that about 3 and 1 half points of their expected sales growth is just that inventory thing reversing. So underlying growth is expected to be roughly flat to up 1%. In other words, they haven't proven the turnaround yet and I'd rather tell you that plainly then pretend the hard part is over. Okay, now let's talk about the dividend because that's what many of us dividend investors love diving into. So Clorox pays 125 per quarter per share, i.e. five bucks a year and at around an $80 share price that works out to a yield of about 6.25%. To put that in perspective, if you bought at 80 bucks a share, 10,000 bucks would buy 125 shares and throw off 625 bucks a year in passive income. That's a pretty nice paycheck. And it comes from a company that's raised its dividend for 49 straight years. Their streak covers the double-digit inflation of the late '7s, the dotcom bust, the 2008 financial crisis, and a global pandemic. So, the board clearly takes it seriously. In fact, Clorox is just one more increase away from becoming a dividend king. a title reserved for companies with 50 or more consecutive years of dividend growth. And based on Clorox's usual timing, that 50th raise could come around next summer. But a yield that high in that type of company is also the market's way of telling you that it has doubts. So, we need to check whether the payout is actually covered. I mean, a yield goes up for one of two reasons. Either the company raised the payout a bunch or the stock price fell a bunch. And in this case, it's almost entirely the second one. So, let's look at the payout ratio, which is the share of profits that goes out as dividends. Measured against earnings, the $5 dividend eats up about 90% of last year's adjusted earnings of 553 a share and around 85% of this year's guidance, which even the CFO admitted was a bit elevated. For a slow growing consumer staples company, a lot of investors start getting nervous once that number creeps above 75 or 80%. On a cash basis, last year was worse because free cash flow was only about 405 million after roughly 27 million of capital spending while dividends cost 602 million. So yeah, the company paid out about 200 million more in dividends than it generated in free cash. Now most of that gap came from the one-time glad payment. And if you added back, then free cash flow would have been closer to 880 million, putting the payout near 68%. Management is also targeting free cash flow of 11% to 13% of sales this year, which I figure lands somewhere between $835 million and a billion. If they hit that, then the roughly $65 million dividend is covered with room to spare, and the rest can go toward paying down that pile of debt. Should they miss it badly, then something probably has to give. I mean, with this much borrowing, I'd guess the first thing to go would be the size of the raise, and a cut would be more of a worst case thing. And we're already kind of seeing that since this summer's hike was a single penny a quarter, which is less than 1%. But hey, I'm guessing their management is also seeing that potential king title in striking distance, so they'll probably do their darnest to get there and keep going. Boards really don't like being the ones who break a 49-year streak. The CFO did say investors should expect the annual increases to continue, though I'd treat that as hope and keep my eyes on the cash flow. TLDDR. I'd call the dividend probably safe but stretched and I wouldn't count on meaningful raises for the next couple of years. Moving on, the next logical question is whether it's at a good price. Well, at 80 bucks, the stock trades at about 14 times this year's expected earnings compared with more than 30 times at the 2020 peak. And this is where a tool like Fast Graphs can really help out. I have a paid relationship with them, though I'll only ever pitch something that I personally use and value. And one big reason I value it so much is that it nicely illustrates how stock prices and earnings move together over time. I mean, over the long run, profits drive stock prices. Of course, in the short term, a stock's price doesn't always reflect what something is actually worth and is often just a reflection of how popular something is at that moment, where fear, greed, and market forces drive prices. But in the long term, the market is a weighing machine, which is why I like to think of a company's earnings as gravity, pulling its stock price toward it over time. That means there can be days, months, or even years where a stock is mispriced, meaning it's cheaper or more expensive than it's probably really worth. And those are exactly the times that may be bigger opportunities to buy or sell, which is what fast graphs can give you insights into. Okay, so the black line shows the stock price over time. And the orange line gives us an estimate of fair value based on the company's earnings, which for this chart is a multiple of 15. So when black is above orange, it might be overpriced and below it might be cheap. But then you should look at the blue line which shows how investors have typically valued the company's earnings over the time frame we've selected. For Clorox, that normal PE ratio is over 21. To me, it looks like for basically a decade, investors have been willing to pay a huge premium for Clorox, keeping that black price line hugging or sitting well above that blue line. I.e. they've been paying more than that baseline 15 times earnings. You can see exactly what happened in 2020 where the black line basically lost its mind and detached from gravity climbing to nearly 240 bucks. But an interesting part is on the far right side of the chart where the black stock price line kind of collapsed. The gravity of earnings finally pulled that price down and it didn't just drop below the blue line. It fell all the way down and touched the orange line. And for a premium sleep well at night company like Clorox, it's incredibly rare to see price hit that orange fair value line. and we literally haven't seen it happen unless we go back to the big financial crash around 2009 and 10. A main takeaway is that the short run is often just about noise and the long run is about profits. So looking at the chart in isolation, I would say right now looks like a historical bargain. Though as always do your own due diligence and never buy a stock based on just one chart or one video that could be wrong. And going from an overheated 30 multiple down to around 14 or 15 is often what happens when a stock goes from being loved to being ignored. In 2020, the price floated way above its earnings, and today it's sitting right on them. So, it's basically the mirror image of what we saw back then. One firm actually cut its target to 80 bucks recently. So, I'm not expecting all of Wall Street to cheer this one on anytime soon. Of course, nobody has a crystal ball. So, let me walk through three different 5-year scenarios using a nice round 80 bucks share price. In a base case, let's say earnings grow 3% a year from this year's midpoint to about 678 a share and the market pays a modest 15 times for them. That gets the stock to roughly 102 bucks. And if the dividend stays at 5 bucks a year, you'd also collect 25 per share over those 5 years. Canning those dividends as cash without reinvesting them, you'd end up with about 127 bucks from an $80 investment, which is roughly a 58% total gain or about 9.6% annualized before taxes. Or picture a bull case where margins recover. Purel delivers earnings grow 6% a year to about $7.83 and the multiple climbs to 18, which is still below its long-term norm. That would put the stock near 141. And adding the same 25 bucks in cash dividends would give you about 166 bucks from your original 80 buck investment, which is roughly 107% total gain or about 15.7% annualized before taxes without reinvesting the dividends. Finally, there's an example bare case where earnings stay stuck around $5.50. The market only pays 12 times and the stock drifts down to 66 bucks, about 17% below where it is today. But even then, in this madeup world, 5 years of Frozen $5 dividend adds up to 25 bucks a share, which would more than make up for that drop and leave you about 14% in total, or a little under 3% a year. Or an even uglier version is a dividend cut. And if they sliced it in half, you'd collect $12.50 instead and end up slightly in the red. So, in that particular scenario, which I doubt will happen, the dividend cushions the price decline, but 66 bucks isn't a floor, and you could still lose a lot more if the business deteriorates even without a dividend cut. Now, compare that with someone who bought near the 52- week high of almost 130 bucks at some point over the last year. In that same bare case, they'd be down almost 30% after dividends. And even the base case would leave them about break even after five long years. Same company, same results, and a completely different outcome. simply because of the price they paid going in. That's really the heart of investing in my opinion since a great brand bought at a silly price can be a lousy investment while a struggling brand bought at a low enough price can turn out just fine. Of course, that depends a lot on your time frame and what you need from the investment. And that brings me to the dividend history I promised because it highlights an important lesson about long-term income planning. Let's pretend you owned 100 shares of Clorox back in early 2020 when it was paying $16 a quarter. So you'd be collecting 106 bucks every 3 months. That year they hiked their dividend to $111 per quarter. And then they did a hike in 2021 to $116 which were both solid 5% raises. After that the annual increases slowed down taking them to $118.224 and finally $1.25 this past summer. So your quarterly check grew from $16 per quarter to $1.25 which is an 18% increase over 6 1/2 years. That might sound great on the surface until you factor in inflation because you'd need about 138 bucks today to buy what your 106 quarterly check bought in January of 2020. In other words, while your income went up from dividend raises, your real purchasing power still dipped by about 10% even though the company never missed a single scheduled raise. The takeway is that a long streak of raises is nice, but it's the size of those raises that determines whether your buying power actually gets ahead. And if you're wondering what that means in practice, well, a dividend growing 1% a year takes about 70 years to double, while one growing 7% a year doubles in roughly 10. A high starting yield with tiny growth can still work, especially if you reinvest it. But you've got to know that's the deal you're signing up for. So, where does all this leave me? Well, I see Clorox today as a cautious, high-risk kind of opportunity rather than a slam dunk. And it's one where the size of your position matters a lot. To me, it's the kind of stock where you could be right about the brands and still wait years to get paid for it. What Odd want to see over the next few quarters is organic sales turning positive without the inventory noise, gross margin holding at 42% or better, and free cash flow landing in the 11% to 13% range. I'd also want to see debt coming down, a CEO who sticks with a plan, and Purel showing up in cash flow instead of only in the sales line. My worry list would be another year of shrinking volumes, more market share lost to store brands, more any hint that the dividend is being funded with borrowed money. The next checkpoint is the earnings report in early November. And one quarter probably won't settle anything, but a pattern of misses probably might. If you have fresh cash and one exposure here, then I'd lean toward buying a little at a time rather than all at once since dollar cost averaging often beats trying to nail the bottom. Now, to be fair, my usually just lumpsum invest when I have the cash, but I think DCA works better mentally for most people. And remember, a 6% yield is never a free lunch. So, I wouldn't let any single stock like this become a big slice of the pie. That all being said, the real reason here is bigger than one bleach company. I mean, think about the folks who chase Clorox at 240 because it felt like the safest stock on the planet. And then notice how different things look at 80 bucks when hardly anybody wants it. The products in between barely change since it's the same brands and the same cabinets under the same sinks. What changed was the results and even more so the expectations. In 2020, people expected the boom to last forever. And now a lot of them expect the slump to last forever. So the price swung way further than the business itself did. And that gap between how much the business changed and how much the price moved is exactly where patient investors sometimes find their edge. I know it's hard to feel motivated when a stock you trusted drops like this. And if you own Clorox and you're sitting on a loss, I get how discouraging that feels. But a rough patch in one holding doesn't make you a bad investor, it makes you just like any longtime investor since I'd wager that everyone who's built real wealth in the market has a few of these in their past. The key is to stay on your investing journey, learn what you can, whether that means holding on or moving on, and let your winners and steady payers carry the load over time. And think about what's really happening when you own a basket of solid businesses. Because millions of people wake up every day and clean their kitchens, feed their pets, and fire up their grills. And a little piece of that spending flows back to you. That's money showing up in your account while you're sleeping, working, or playing with your kids. And it grows a bit more each time you add to it. You don't need to be a genius to build wealth. And you sure don't need to catch every bottom. Mostly, you just need to keep showing up, keep putting money to work at sensible prices, and keep your emotions from driving the car. I mean, I've been investing for decades. I've made plenty of mistakes along the way. And the thing that helped me the most was simply never permanently quitting. Every dividend you reinvest and every paycheck you invest a piece of is a brick in a house that will probably shelter you and your family someday. Some bricks will crack and that's okay because the house stands on all of them together. So, if you've been sitting on the sidelines waiting for the perfect moment, let this be your nudge to start, even if it's just 50 bucks into an index fund this week. Start where you are. Use what you have and let time do the heavy lifting because consistency often beats brilliance in this game almost every time. That's how ordinary people end up with extraordinary results. Future you is counting on the choices you make today. And I truly believe that version of you will be grateful you didn't wait. TLDTR Clorox fell about 2/3 from its pandemic peak because of an overheated price, squeezed margins, a messy software transition, and a big jump in debt. But at 80 bucks with a 6% yield and 14 times earnings, a lot of bad news is already baked into it. It still has to prove it can grow, cover the dividend with real cash, and pay down what it borrowed. So, I see it as a patient person's bet rather than a sure thing. Leave me your thoughts and also tell me if you still buy brand names like Clorox and Glad or if you've completely switched to generics to lower your expenses. And let me know if Clorox looks tempting at this point or if something else makes more sense to you. Whatever you think, please do me a favor and hit the thumbs up button. Subscribe if you haven't yet and click that bell notification. Moving on. Next, I'd like to show my gratitude to subscribers who left me kind comments. So, I'm going to shout out 10 who've done just that. So, thanks go out to PPCan LRJK2K, Kurt Ard Doll, Dogs, Sven Han, Comp Tai Anguin, D Spore, and multiple from Brian Builds Wealth, multiple from Jason the Man, and multiple from Todd Brumble. [music] Thanks, folks. I really appreciate it. Next, I'd like to pitch my Seeking Alpha affiliate link, which often has benefits when new people sign up. I'd also like to pitch my FastGrafts affiliate link along with my coupon code in the description of this video, as using both will allow new subscribers to get 25% off the first payment, even if they sign up for a full year. Also, check out my Patreon page and or consider joining my channel membership as both have some cool perks you might like. Finally, I'll close this off by recommending that everyone join my free dividend Discord chat server, which has 11,000 dividend investors on it from 88 countries around the world. Thanks for watching. Stay positive. I'll talk to you again real soon. Remember, I'm not a financial adviser, and my videos are for entertainment and inspirational purposes only. Investing of any kind involves risk. I'm only sharing my opinions with no guarantee of gains or loss on investments.