Generating passive income is a great way to increase wealth. This way the money accumulates while you are free to work on your career or sit on a beach enjoying the sunset.
If you are looking for passive income, which I imagine you are because you clicked on this article, then Clorox (CLX 0.78%) could be a solid choice. The company has just increased its dividend payment again. Let’s explore why passive income investors may consider Clorox stock for their portfolios.
A tailwind turned headwind pinches Clorox earnings.
On July 12, Clorox announced that it would increase its quarterly dividend payment to $1.18 per share. This means that investors who buy Clorox stock will receive quarterly payments totaling $4.72 per year. This isn’t the first time Clorox has raised its dividend; from 2012 to 2021, the company increased its annual dividend per share from $2.40 to $4.44.
These increases have steadily increased its dividend yield, which now stands at 3.15%. Clorox’s dividend is attractive as a 10-year US government bond yields less than 3%. But the company could struggle to increase its dividend payout over the next few years at the same rate as in the previous decade. Clorox’s dividend payout ratio was more than 100% most recently, meaning the company paid out more dividends than it generated earnings.
This trend is unsustainable because, eventually, the company will run out of savings to pay dividends and will exhaust its borrowing capacity. For Clorox to increase dividends, it must manage earnings growth. It flourished at the start of the pandemic as millions increased their purchases of cleaning products. This trend has reversed as vaccinations against COVID-19 have accelerated and fear of the virus has diminished.
Clorox expects sales to fall 2.5% mid-year. Moreover, the company has not been immune to widespread inflation, as its costs have increased even as its sales have fallen. As a result, management expects earnings per share to decline by 33% by mid-fiscal 2022.
Clorox stock is not cheap.
Interestingly, Clorox shares are trading at a price-to-earnings ratio of around 40 and free cash flow of 32.5, near the expensive side of its previous five-year averages. Of course, all price ratios have a numerator (the stock price) and a denominator (depending on the metric being assessed). The rise in Clorox’s valuation is the result of declining earnings and cash flow rather than a rising share price. On the contrary, Clorox stock is down 38% from its five-year highs.
In other words, passive income investors would pay a higher price with an attractive 3.15% dividend yield on Clorox shares.
Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.