The Clorox Company (NYSE: $CLX
) is deemed unattractive for investment at present levels due to being overvalued compared to peers. In addition, the company faces the potential risk of cutting dividends if management fails to enhance margins. Consequently, we will steer clear of CLX as the perceived downsides outweigh potential upsides at the moment.
Despite a positive market trend in 2023 and a promising outlook for 2024, uncertainties loom over the macroeconomic landscape, including inflation, interest rates, and geopolitical risks. In such times, consumer staples are considered a secure investment. This analysis focuses on Clorox which underperformed the market over the last year.
Clorox is a multinational consumer goods company. It reported Q2 2024 results, indicating some positive outcomes with the stock jumping after earnings. Net sales increased, margins increased and EPS improved.
Examining Clorox's fundamentals over the last decade reveals challenges. While revenue per share grew by an average of 3.5% annually, recent years saw limited growth. Adjusted EPS declined after the pandemic, attributed to investments and impairment charges. Free cash flow per share increased, but net debt per share rose significantly. Share buybacks were successful until fiscal year 2022, with a marginal increase in shares outstanding in fiscal year 2023.
Clorox offers a 3.0% forward dividend yield, with a history of increasing dividends by 6.0% annually. However, the unsustainable payout ratio reached 391% in 2023. If EPS does not grow, there is a risk of dividend cuts.
Relative to peers, Clorox is considered overvalued based on forward price-to-earnings and forward price-to-cashflow multiples. Comparisons with competitors like Procter & Gamble and Colgate-Palmolive suggest that they are better investment options.
The primary risk for Clorox lies in macroeconomic conditions affecting consumer spending. High inflation levels and decreased savings make consumers price-sensitive. Management's challenge is to expand margins while consumers prioritize value.
We think CLX is overvalued relative to peers, management will struggle to improve margins hence dividend might be at risk. We continue to monitor the company and we want to see management's actions materialise before we consider CLX a buy.