In the big scheme of life, invest in a whitening and cleaning supplies business like Clorox (NYSE: CLX) is not particularly exciting. Reliable, but not exciting.
This changed completely a month ago for American investors, of course, when the global contagion of coronaviruses took root in North America. Within days, bleach was almost impossible to find – in stores or online. Ditto for Clorox disinfectants and spray wipes. Some of these products were (literally) only available on the black market, at outrageous prices.
It will not be the case forever. Ultimately, consumers will have sufficient inventory and manufacturers of cleaning products will be able to replenish store shelves. In one way or another, however, consumer behavior may have been permanently changed by the realization that something you can’t even see can still be devastating. We will all spray and wipe our homes a little more often than before the COVID-19 epidemic.
It’s the long way to say yes, if Clorox was a good stock to own before March of this year, it’s a great stock to own from now on.
More than just a consumer name
For the record, Clorox is not just bleach. It’s not just bleach and disinfectants either. In fact, cleaning products account for only about a third of its revenues and about half of its operating revenues. The company also has brands such as Fresh Step cat litter, Glad trash bags, and Kingsford charcoal. These are all refined products, but not necessarily essential for defending yourself against a pandemic.
Yet all of its products are the kind of inexpensive and reliable products that are loyal to consumers, prompting repeat purchases without second thought.
Do not confuse the apparent simplicity of these products with a lack of sophistication on the part of the company. As clients seek rash solutions to everyday problems, Clorox has spent a great deal of time and attention figuring out what drives customers. It does not consider itself a product company. In the words of Doug Milliken, its vice president of “marketing transformation,” he sees himself as “a customer experience business.” In the same spirit, it does not only have a digital presence. It’s “being digital” because “the business has to be organized and run digitally from start to finish.”
It’s a pretty high-end thought for a company that sells bleach, a stubble cultivator and charcoal. And yet, it is not the end of the organization’s efforts to stay ahead of its competitors. The development of new products is not managed by a team of people pushed into a room for a few hours and charged with simply creating something new. The company has created what it calls the Clorox Open Innovation Group, which facilitates discussions between the right people – including outsiders – and provides them with data to make decisions. One of these recent innovations, for example, is the creation of a disinfectant wipe that is compostable when used.
The numbers don’t lie
Perhaps the strategy is excessive for the products and derivatives of products that consumers would probably have bought anyway.
But it is difficult to dispute the success that this obsession has earned the organization. The name Clorox has almost become synonymous with bleach. And most consumers would probably be hard pressed to name a brand of charcoal to grill other than Kingsford. The happy result is years of generally unhindered sales and profit growth:
Analysts also do not expect the company’s growth trajectory to be altered by the fallout from the coronavirus. If anything, given the surge in demand for products in the most significant segment of Clorox – cleaning – analysts may collectively underestimate the future of the business. While it is difficult to say exactly how or to what extent they can change, it is equally difficult to believe that consumer hygiene behaviors will not remain at least slightly elevated once contagion in the rear view mirror occurs.
Slowly but surely, we succeed
Clorox is not a growth stock, to be clear: single-digit sales growth is the norm. The gains are increasing at a slightly faster rate, but only slightly. It is not a winning lottery ticket.
For investors who have time and patience, Clorox is an easy name to own. It doesn’t require a lot of monitoring. Best of all, the nature of the business is simple, but the current management team understands that consumer behavior is deceptively complex, and this team has proven itself to be up to the task. Again, the results speak for themselves. That’s why the company is such a “Steady Eddie” name.
The dividend yield of just under 2.5% is not too bad either – at least in today’s low yield environment. And the company has not failed to increase its dividend for 43 consecutive years.
This is another key feature of the actions of millionaire manufacturers. In a study shared in February, Hartford Funds confirmed (again) that, on average, dividend paying stocks significantly outperform long-term dividend payers when those dividends are reinvested.