Clorox Pullback Presents a Chance to Clean Up on a 3.6% Dividend

Key Points

• Clorox's forward dividend yield is now the highest it has been since 2011 and at 3.6% is nearly twice the consumer products sector average.
• Clorox's recent underperformance is mainly about inflation and rising interest rates that can cause consumers to trade down from branded products to generics.
• CLX is trading at 23x forward earnings compared to the tech-heavy Nasdaq-100, which currently has a forward P/E around 27x.

Since The Clorox Company NYSE: CLX rode a pandemic ‘clean freak’ wave to nearly $240 per share in August 2021, its market value has been bleached by over $13 billion. 

The dirty truth? Clorox’s 44% two-year plunge has created an opportunity to own a defensive stock with a shiny dividend.

The consumer products mainstay’s 3.6% forward dividend yield is now the highest it has been since 2011 — and nearly twice the sector average. Better yet, it is a dividend that is only likely to go higher, considering Clorox is a Dividend Aristocrat on account of its 37-year dividend hike streak. In July 2023, the dividend was boosted 2% to $1.20 quarterly (or $4.80 annually).   

So why is the current stock price so low and the dividend yield so high?

Clorox’s latest slump is a bit of a head-scratcher. The company crushed the consensus earnings per share (EPS) estimate and posted 80% year-over-year profit growth in fiscal Q4. Revenue growth accelerated to 12% with positive contributions from all four operating segments. Profit margins widened, and management predicted further improvement in profitability in fiscal 2024. The market responded appropriately, bidding Clorox shares up 9% on August 3rd. Since then, however, they are down 20%. What gives?

Why Is Clorox Stock Down So Much?

In recent weeks, Clorox has been in the spotlight for a mid-August cyberattack that targeted the company’s IT systems. Last week, management disclosed that the attack has led to “widespread disruption” of operations, and current quarter financials will be negatively affected. While not good news, the hack will probably amount to a temporary setback for the 110-year-old company.

The main reason though is that the broader market has been in a downtrend since August 3rd — albeit a mild one, with the S&P down about 3%. For Clorox, the huge underperformance is about two familiar foes — inflation and rising interest rates. With the Fed vowing for at least one more rate hike by year-end to combat sticky inflation, the impact on Clorox sales could be negative. As has been the case for the last two years, consumers may be more likely to trade down from branded cleansers and cat litter to generics. It is why management is projecting just 0% to 2% revenue growth in the new fiscal year. 

But if the economic outlook has worsened as the recent market downturn implies, a defensive stock like Clorox may become the hottest ticket in town. As the S&P 500 retreats from the 4,600 level and lofty tech stock valuations get recalibrated, a rotation to ‘boring’ consumer staples may be underway. If it is, it may be 2022 all over again.   

Although Clorox’s fiscal 2024 revenue outlook isn’t inspiring, the glass may be half full for several reasons: 

1) As technology and other high-growth companies start to face difficult year-over-year comparisons in the coming quarter, single-digit growth would look pretty good relative to negative growth.

2) Considering Clorox has comfortably topped both revenue and EPS estimates in each of the last four quarters, there’s a good chance management is being overly conservative. Low ball guidance that gets beat often leads to significant stock outperformance. 

3) Due to price increases, cost savings initiatives and supply chain optimization, Clorox is projecting adjusted EPS growth of 10% to 16% for the next 12 months. That’s not too shabby, given the industry’s macro challenges.  

It means that CLX is trading at 23x forward earnings. The tech-heavy Nasdaq-100 currently has a forward P/E around 27x. Suddenly, CLX doesn’t look so bad. 

If market sentiment continues to sour on mega-cap tech, defensive income generators like CLX may benefit. Wall Street’s average price target ($149) plus the 3.6% dividend gives the stock more than 16% total return potential over the next 12 months.  

What Are Some Other Defense Dividend Stocks to Consider?

There are several other Dividend Aristocrats that are flashing attractive yields — and have bullish analyst sentiment. MarketBeat’s robust stock screening tool reveals these top candidates:

1) ABBV - AbbVie has raised its dividend for 51 consecutive years and has a 3.9% forward yield. This week, the $154 stock received a $170 price target from Piper Sandler.

2) CVX - With oil prices trending higher, Chevron has been the subject of bullish commentary and price target increases over the past 30 days. The Dividend Aristocrat offers a $6.04 per share annual dividend.

3) MDT - Medtronic, a 47-year dividend grower, boasts a 3.5% dividend that’s more than double the healthcare sector average. Combined with a bullish consensus target, the stock could have more than 20% total return upside.