Clorox (NYSE: CLX) the stock price is down about 17% year-to-date, slightly outperforming the broader market, which is down nearly 20%.
Although CLX shares have a strong track record of outperforming the broader market in times of low consumer confidence, we believe that at current valuations the company is not a clear buy. Not only valuation, but macroeconomic headwinds, leading to margin contraction, are also of concern to us.
First, let’s see what we like about Clorox at this point.
Performance in times of low consumer confidence
Consumer confidence is often regarded as a leading economic indicator, which can help investors assess the likely direction of consumer spending in the near future.
US consumer confidence has steadily declined in recent months, even falling below levels seen in 2008-2009, during the financial crisis. Although consumer spending remained strong in the first half of 2022, we believe that weak consumer confidence is likely to have a substantial impact on spending in the not-too-distant future.
In times of low consumer confidence, consumers tend to reduce or delay their purchases of durable, discretionary and non-essential goods. Companies that sell this type of product are the most affected. On the other hand, companies like Clorox will likely be relatively spared. Even when confidence is low, people continue to buy household products, although there is often a shift to lower cost alternatives.
So let’s take a look at how Clorox stock has actually performed over the past 30 years during times of low consumer confidence.
During this period, the S&P 500 (SPY) and Clorox gained. However, Clorox outperformed the broader market by around 24%.
Between 2001 and 2003, after the bursting of the dot-com bubble, the broader market fell 33%, while CLX gained about 16%.
Between 2007 and 2010, the period that contains the financial crisis, the S&P500 and the Clorox both ended in negative territory. But CLX once again significantly outperformed the broader market falling just 5%, compared to SPY’s 21% decline.
During this period, CLX and SPY more or less performed online and both ended the period in positive territory.
Overall, we can see that CLX has performed very well historically during times of low consumer confidence.
In our view, due to Clorox’s extensive product portfolio and strong brand recognition/loyalty, demand for the company’s products will remain high in the near term. Therefore, we believe the company is well positioned to outperform again in the current market environment.
Now let’s look at some aspects of the company that we don’t really like at this point.
The company’s margins were significantly impacted in the first quarter of 2022. Rising costs, including manufacturing, logistics and raw materials, significantly hurt margins. The company was unable to offset these negative impacts through pricing.
Due to geopolitical tensions in the Eastern Europe region, we expect energy prices to remain high for the rest of 2022. On the one hand, there has been positive news on last month, regarding OPEC+ increasing production by a higher amount than expected. , but prices haven’t come down much. On the other hand, Europe’s gas supply has become quite uncertain after Russian gas supply has been cut for some time. The Freeport LNG plant incident in the United States further aggravated the situation and caused gas prices to skyrocket.
Due to the high uncertainty in commodity prices in the near term, we do not expect significant improvement in CLX margins in the near term. Before we can rate the stock as “bought,” we’d like to see the company prove that it can successfully pass on increased costs to customers and increase margins.
We believe the company is not particularly attractive from a valuation perspective. When looking at a set of traditional price multiples, including price/earnings ratio, EV/EBITDA and price/cash flow, all indicate that the company is trading at a significant premium to its peers.
Although demand for CLX’s products has remained relatively high, declining margins are having a significant effect on the company’s earnings.
We believe the current price multiples are not warranted and would like to see the stock price decline materially or profit margins improve before we consider investing in the company.
Clorox has a strong track record of returning value to its shareholders in the form of dividend payments. The company has actually been paying dividends to its shareholders for 44 years in a row, and they’ve even managed to increase the dividend every year for the past 20 years.
Currently, the company pays a quarterly dividend of $1.16 per share, which equates to an annual yield of approximately 3.2%.
On the other hand, Clorox’s dividend payouts currently look unsustainable. The dividend payout ratio (TTM) (GAAP) of over 125% and the cash flow payout ratio (TTM) of 85% are both concerning.
Due to high payout rates, we are currently avoiding CLX shares. We believe there are better high yield stocks on the market, with a safer and more sustainable dividend yield.
Key points to remember
Clorox has a strong track record of outperforming the broader market in times of low consumer confidence. Because demand for household products is relatively inelastic and is expected to remain elevated, a change in consumer buying behavior is not likely to materially impact Clorox’s financial performance.
On the other hand, due to increased costs including logistics, manufacturing and raw materials, CLX margins have contracted significantly in the first quarter of 2022. Due to the high price uncertainty of l energy caused by the geopolitical tension in the Eastern Europe region, we do not expect any significant margin expansion in the near term.
The company has a dividend payout ratio of over 100%, raising concerns about the safety and sustainability of short-term dividend payments.
We are avoiding CLX at this time.