Dividend growth investors looking for consumer staples exposure coupled with a hedge against future epidemics/pandemics might view Clorox as an excellent consideration for their portfolios. Shares yield a healthy ~2.1% at the time of this writing.

By Brian Nelson, CFA

On November 2, Clorox (CLX) reported stellar fiscal first-quarter earnings (period ending September 30) and raised its fiscal 2021 outlook. Revenue during the fiscal first quarter advanced 27% while diluted earnings per share more than doubled, to $3.22. Both figures came in better than expected. Fiscal 2021 revenue growth is now targeted at 5%-9% (versus guidance for a flat- to low-single digit increase previously) while diluted EPS is now expected in the range of $7.70-$7.95 for the year (versus $7.64 consensus). Net cash from operations advanced more than 40% in the period.

The equity value of Clorox has advanced substantially in the presence of the ongoing threat of COVID-19, but there is also increased sustaining value, too, as the world comes to grips that it can never truly become immune to future pandemics, even in this advanced age of medical and technological breakthroughs. Our fair value estimate of Clorox has marched steadily higher during 2020, and it now sits just below $200 per share. Despite the company’s massive share-price advance, Clorox’s stock is fairly valued, in our view, thanks in large part to the opinion that changes in demand for its products are more structural in nature--meaning consumer buying patterns for cleaning/disinfecting products have permanently changed as a result of COVID-19.

Clorox’s products have become hard to find. Several off-brand competitive products have been experiencing higher levels of demand as a result of its brand-name absence, but we expect the Clorox brand name to take back share once its products become more readily available on shelves. Clorox’s CEO Linda Rendle’s top priority remains “maximizing the supply of (its) products,” and prudent increases in capacity to meet surging demand across its portfolio might set up the company for yet another guidance raise as the fiscal year progresses. In a post-COVID-19 world, Clorox’s brand name has become considerably more valuable, but the market has definitely taken notice. The company is no hidden gem, by any stretch; the market knows this story well.

The dramatic improvement in operating performance has changed the game at Clorox, in our view, and its dividend ratings have shown commensurate improvement. No longer does the company’s net debt position weigh it down, given the tremendous improvement in future expected free cash flow generation that we expect to handily cover growing dividend obligations. Dividend growth investors looking for consumer staples exposure coupled with a hedge against future epidemics/pandemics might view Clorox as an excellent consideration for their portfolios. Shares yield a healthy ~2.1% at the time of this writing.

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Brian Nelson owns shares in SPY, SCHG, DIA, VOT, and QQQ. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.