Church & Dwight is a wealth builder for buy-and-hold investors

Key Points

• Church & Dwight is a Dividend Aristocrat on track to be crowned a King
• Earnings and revenue growth are driven by volume increases not posted by other manufacturers. 
• The dividend yield is low at 1.25%, but the outlook for sustained annual increases is robust. 

Church & Dwight (NYSE: CHD) is exactly the kind of company and stock that dividend growth investors are looking for. It is a well-managed business focusing on consumers and investors, providing value for both. For investors, the opportunity is the dividend and outlook for capital growth. 

Church & Dwight isn’t a high-profile stock, to be sure, but that is a fact that favors investors. Among the benefits of owning CHD is an ultra-low 0.5 beta to help mitigate risk within an income portfolio. 

Church & Dwight is already a Dividend Aristocrat on its way to kingship. The only thing standing in its way is time, which management uses to significant effect. The latest quarterly report is a testament to their execution, providing a long trajectory for sustained dividend payments and annual increases investors can leverage to grow their portfolios. If owning a Dividend King is a good thing, owning stocks on track to be crowned king is better. 

Church & Dwight has a solid portfolio of brands, gains share

Church & Dwight is a smaller Consumer Staples Products company with annual revenue of about 1 third Colgate-Palmolive NYSE: CL and less than a tenth of Procter & Gamble NYSE: PG, but it is well-positioned and growing. The company offers a range of specialty and niche personal and family care items with entrenched, market-leading brands. Brands include Arm & Hammer, Oxi Clean, Trojans, Nair, and Waterpik. 

None of the brands are blockbusters, but all have carrying power and are gaining traction in domestic and international markets. Both segments grew by double-digits in Q3 to align with larger competitors and came with improved guidance. Among the report's details is volume growth in 11 of 17 brands and share gains in brands representing 64% of revenue. 

Management produces results, and volume grows 

Church & Dwight is doing something that many consumer products are not, and that is positive volume growth. The Q3 results included top and bottom line growth that outperformed consensus estimates on a 2.7% increase in volume and a 2.1% increase in price and mix. Within that, 11 of 17 categories produced volume growth and share was gained in many. Digital continued to drive results and came in at 17% of sales. 

Margin is another area of success. The company widened its gross margin by 270 basis points and produced a significant beat on the bottom line. The only bad news is that earnings fell compared to last year, but the details offset the decline. An increase in CAPEX to drive future sales is included in the mix, and it is expected to return to historical norms in fiscal 2025. Analysts forecast mid-single-digit topline growth for F2024 with margin expansion. 

Church & Dwight has a strong cash flow and a fortress balance sheet

Church & Dwight produced nearly $800 million in cash flow in the first 9 months and is on track to deliver more than a billion by year-end. After CAPEX, the company has more than $750 million in free cash flow, used for dividends and to manage the balance sheet. The balance sheet is rock solid with leverage of 0.6X equity, cash and equity on the rise, and debt in decline. These trends should continue, along with dividend increases, and help drive the stock price higher over time. 

The dividend has only 1 bad aspect, and that is the yield. Trading near $86.50, the yield is about 1.25%, but the outlook for distribution growth offsets that. The company pays less than 35% of its earnings compared to 60% to 70% for its larger competitors. This provides an element of safety for today and fuel to sustain distribution increases without the addition of earnings growth. With earnings growth in the picture, this company can sustain a higher distribution CAGR than it currently runs, about 5%, indefinitely. 

The technical outlook: Church & Dwight confirms bottom

The Q3 results did not catalyze a rally in this stock but the exact opposite. Price action fell more than 5% at the movement's low, but there is good news for buy-and-hold investors. The market confirmed the bottom of a trading range that has kept it moving sideways since 2020. This range will likely dominate the market for the foreseeable future, but lower lows are not expected. Because the post-release sell-off hit bottom at a critical trend line, upward bias is expected within the range. 

The CQ1 dividend declaration could provide the catalyst to move this stock out of its range. The Q1 declaration should include a distribution increase that may be larger than the historical indications. The company has raised its dividend by a penny per quarter since 2018 and is due for a larger increase to get the distribution growth rate back into the high single digits.