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Clorox Hikes Its Dividend, But Valuation Is a Concern

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Dividend increased 10%

On May 20, The Clorox Company (CLX) announced a 10% hike in its quarterly dividend to $1.06 per share from $0.96. Clorox is a dividend aristocrat, which in simple terms means the company has consistently hiked its dividend for more than 25 years. The announcement marked the 42nd consecutive year where Clorox has increased its dividend. Over the last year, Clorox raised its quarterly dividend by 14%.

Clorox has a rich history of rewarding shareholders in the form of dividends and share buybacks. In the last four years, Clorox returned more than $2 billion to its shareholders through cash dividends and share repurchases. In fiscal 2018, Clorox returned about $721 million to stockholders.

Growth in dividends and share buybacks reflect the company’s strong cash flow generation ability. Clorox expects to generate a free cash flow of about 11% to 13% of sales in fiscal 2019. However, weakness in sales and pressure on margins are expected to hurt.

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Dividend yield and valuation

Despite the dividend hike, Clorox’s dividend yield of 2.4%, based on its closing price of $146.72 as of May 20, remains lower than Kimberly-Clark (KMB) and Procter & Gamble’s (PG) current dividend yields of 3.2% and 2.8%, respectively. Meanwhile, Colgate-Palmolive (CL) has a dividend yield of 2.4%.

Clorox stock is trading at a lower valuation multiple than most of its peers. It trades at a forward PE multiple of 22.6x, which is lower than Church & Dwight (CHD), Colgate-Palmolive, and Procter & Gamble’s forward PE multiples of 29.1x, 24.8x, and 22.9x, respectively.

However, pressure on sales and margins—and projected mid-single-digit growth in the company’s EPS in fiscal 2020—makes Clorox stock unattractive on the valuation front.

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