Vaccine or Not, Wall Street is Making a Big Mistake by Selling This Stock

This dividend stock should continue to grow revenue and earnings even after the COVID-19 pandemic.

Nov. 26, 2020

This article originally appears on The Motley Fool, written by Daniel Foelber.

During the height of the COVID-19 pandemic, owning Clorox (NYSE:CLX) stock was like driving a Toyota Camry when gas prices were high. You had the dual benefit of safety and reliability and the excellent gas mileage to keep fuel costs down. Positive vaccine news and hopes that the pandemic is coming to an end have sparked a broad sell-off in many so-called “stay at home stocks,” or really any company that is benefiting heavily from the pandemic. But Clorox isn’t like those other companies.

There are plenty of reasons to own Clorox aside from its pandemic-driven tailwinds. Like a Camry, Clorox is safe and reliable no matter what. Here’s why it could deserve a place in your portfolio right now.

Strong performance could continue

After an initial bump during the beginning of the pandemic, shares of Clorox haven’t really moved. Despite its fantastic results, the stock has underperformed the market — and the consumer staples sector — over the past six months.

Clorox has been growing its top and bottom line during a time when other companies are struggling to gather their footing. The company reported an 8% increase in sales and a 16% increase in diluted earnings per share (EPS) for its fiscal year 2020 (FY20), which ended June 30. Its first-quarter FY21 results were also impressive. Clorox noted that “in the first quarter, sales increased 27%, driven by double-digit growth in eight of 10 business units due to COVID-19 and people spending more time at home.”

The fact that several of Clorox’s segments are doing well, not just health and wellness, signals that the company is benefiting more from the pandemic than folks may realize. Higher demand for cleaning products is one thing, but the company’s household segment actually did even better. It includes bags, wraps, and even cat litter, and posted 39% higher sales in the most recent quarter.

The company is now guiding for a 5% to 9% increase in sales growth and a 5% to 8% increase in diluted EPS over the period from July 1, 2020 to June 30, 2021. This forecast assumes a strong quarter for the period ending Dec. 31, and then a slowdown of pandemic-related tailwinds. But even with that fleeting tailwind, Clorox expects the first half of 2021 to be “significantly stronger relative to pre-pandemic levels.” Wall Street seems to be ignoring this stock because it thinks Clorox wipes won’t sell as much after the pandemic. There’s a lot more to this business than just wipes, and Clorox seems like it is well positioned to grow even after the pandemic.

Attractive valuation

The last thing anyone wants to do is pay more for something than it’s worth. The good news is that Clorox should be worth more now than it used to be, but the stock price isn’t reflecting that.

Clorox’s stock price has languished as its results have improved. This is good news for investors considering picking up a few shares, because its valuation relative to its earnings and free cash flow (FCF) is now lower than usual.

The result is that shares of Clorox are now trading at their cheapest price in five years from a price-to-FCF perspective. They are also trading near the low end of the stock’s five-year average P/E ratio. The stock looks even cheaper considering the company’s positive guidance for the rest of the fiscal year. 

A rock-solid dividend

Clorox has raised its dividend for 43 consecutive years, earning it a spot on the coveted list of Dividend Aristocrats. A Dividend Aristocrat is a company that has raised its dividend for 25 consecutive years. Due to the steady nature of their earnings, there are several consumer staple stocks on the list, such as Procter & Gamble and Coca-Cola. Clorox’s status as a Dividend Aristocrat gives investors confidence that the company is committed to raising its dividend through thick and thin. And thanks to its impressive performance, the company has plenty of extra cash, some of which can be used for future dividend raises. Clorox yields 2.2% at the time of this writing.

Safe and reliable

Clorox may not be the flashiest company, but it’s a great option for retirees, income investors, or really anyone looking for a low-risk investment. Like a Camry, Clorox is well balanced. It’s unlikely to wow your neighbors or stand out in a crowd, but it gets the job done for a good price.

The stock market is near an all-time high, but COVID-19 cases are on the rise. On Thursday, the CDC urged people to stay home for Thanksgiving. Given all this uncertainty, Clorox looks like a great way to participate in the stock market while also being able to sleep well at night.

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