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Clorox Co (CLX): A Reliable Dividend Aristocrat for any Economic Environment

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Clorox Co (NYSE:CLX) has increased its dividend for nearly 40 straight years and owns some of the most well-known and recession-resistant consumer brands in the country. The company is a fraction of the size of P&G and has numerous growth opportunities to pursue over the coming years.

CLX Dividend

Source: Los Angeles Times

While the stock might not be a bargain today, it shares many characteristics with some of the holdings in our Top 20 Dividend Stocks portfolio.

Out of some 730 hedge funds and other institutional investors tracked by Insider Monkey, 31 reported long positions in CLX as of the end of the third quarter of 2015, versus 27 funds a quarter earlier. Moreover, the aggregate value of positions held by these funds surged to $904.49 million from $723.78 million between July and September and amounted to 6.10% of the company’s outstanding stock. Among these funds, Andy Brown’s Cedar Rock Capital and Jim Simons’ Renaissance Technologies held 3.13 million shares and 1.83 million shares of CLX, respectively.

Business Overview

CLX started in 1913 with five people and one product in Clorox bleach. In fact, CLX remained a one-product company for its first 56 years. Today, the company has over 7,700 employees, sells its products in more than 100 countries, and boasts a brand portfolio spanning numerous product categories including home care, laundry, charcoal, food, water filtration, cat litter, and more. Some of the company’s famous brands are Clorox, Pine-Sol, Glad, Kingsford, Hidden Valley, Brita, and Burt’s Bees.

As seen below, CLX generates about 32% of its sales from cleaning products, 32% from household products, and 17% from lifestyle products and derives 19% of its revenue from faster-growing international markets.

CLX Sales Mix

Source: Clorox Annual Report

Business Analysis

As a consumer products company, CLX’s primary competitive advantages are its strong portfolio of brands, shelf space with retailers, marketing expertise, and product innovation.

With the Clorox brand dating back more than 100 years, CLX has benefited from being one of the first brands in consumers’ minds for most of its key product categories. When you walk down the aisle of your favorite retailer and see CLX’s main household brands, you know they will deliver quality.

As a result, over 80% of CLX’s sales are generated from brands with a number one or number two market share position. Overall, Clorox has 23% market share and is three times the size of its next largest branded competitor. The company focuses on attaining large market shares in mid-sized categories, which also helps it avoid going head-to-head as much with giants such as P&G.

Just like we noted in our analysis of P&G, the non-food consumer products space is very sticky and generally less subject to change. According to IRI Market Advantage, 85% of American household needs are consistently filled with the same 150 items, and 60-80% of new product launches fail.

In other words, CLX maintains a durable and sticky market position, and new entrants really struggle to win over consumers who are happy with incumbents’ offerings.

To stay relevant, the company is constantly conducting consumer research to help it launch innovative products and sharpen its marketing campaigns. CLX spent $523 million on advertising (9.2% of sales) and invested $136 million on R&D (2.4% of sales) during its last fiscal year.

Smaller competitors and new entrants don’t have the financial firepower to build up their brand recognition with consumers and retailers.

CLX’s extensive distribution networks around the world are another major strength. CLX can expand the types of products under its brands or acquire new products and sell them throughout the world very efficiently. For example, the company launched the Burt’s Bees Renewal face care line last fiscal year to enter the fast-growing $24 billion anti-aging face care category. Since consumers are already very familiar with the Burt’s Bees brand, CLX can more easily grow its business in new areas.

Finally, CLX’s vertical integration and efficiency initiatives help keep its product costs very competitive. The company’s cost-savings program has delivered about $100 million or more in annual savings since 2003, and CLX operates 37 manufacturing facilities around the world.

Overall, the company expects to grow sales by 3-5% per year and improve operating margins by 25 to 50 basis points per year. With strong brands, extensive distribution channels, relevant marketing campaigns, and large and fragmented markets, CLX has plenty of opportunity ahead of it.

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