2 Consumer Defensive Stocks With 45+ Years of Dividend GrowthOctober 19, 2022
Lately, I have been sharing investment ideas that incorporate non-cyclical business models, extended dividend-growth track records, attractive yields, and evidence of strong cash-flow generation during market downturns. I believe that these characteristics can increase investors’ margin of safety during the highly-uncertain market landscape and enhance the predictability of one’s future total-return projections. Boasting 45 and 50 years of consecutive annual dividend hikes, The Clorox Company (NYSE: CLX) and Kimberly-Clark Corporation (NYSE: KMB) meet these criteria.
This is due to their household and personal care products enjoying stable demand, a great trait during the current highly-inflationary environment.
My concern, however, is that both companies appear significantly overvalued, while their dividend-growth prospects are uninspiring. Thus, their future total-return prospects could be limited or even negative following a valuation multiple compression.
Accordingly, I am neutral on both CLX and KMB stock.
Inspecting CLX’s & KMB’s Dividend Prospects
Both CLX’s and KMB’s investment cases revolve around their dividend since they feature little to no growth prospects. Specifically, CLX and KMB feature 10-year revenue compound annual growth rates of 2.7% and -0.7%, respectively. Their earnings-per-share CAGRs over the same period stand at -0.9% and 3.0% as well. These numbers showcase their mature operations and rather stagnant industries they operate in.
Therefore, to evaluate whether CLX or KMB are worth investing in, we are going to review whether investors can count on their dividends and what dividend-growth pace one should expect.
CLX’s latest dividend hike occurred back in July and was by a rather disappointing 1.7% to a quarterly rate of $1.18. In the case of KMB, the company last hiked its dividend by 1.8% to a quarterly rate of $1.16, which is an equally disappointing growth rate.
This theme is not coincidental. In fact, over the past decade, both companies have been gradually decelerating the pace of their dividend increase in the face of stagnated earnings. Otherwise, their payout ratios would grow unsustainable.
In fact, this is already appearing to be becoming the case. With both companies raising their dividends against static earnings, their payout ratios grew increasingly alarming.
CLX’s guidance for Fiscal 2023 targets adjusted earnings-per-share to be between $3.85 and $4.22. Even if we assume that the company will deliver on the higher end of this range (e.g., $4.20), this implies another year of stagnated earnings and a payout ratio of 112%. Consensus earnings-per-share estimates for KMB’s Fiscal 2022 also hover at $5.63, implying an 8.9% decline year-over-year and a payout ratio of 82.4%.
Consequently, I would say that while both CLX and KMB are likely to continue producing resilient revenues and profits during the ongoing market downturn, investors shouldn’t expect…