Saturday, November 23, 2013

Is Clorox a Buy?

All time market highs make bargain hunting hard graft (in the US markets at least). Where can we find a safe harbor to invest at current prices?

Over at Morningstar, Josh Peters makes the case for Clorox. I really like finding companies like Clorox when they sell at a good price. Is Clorox a good buy today? We'll get to that in a minute, but first here is the main reason why companies like Clorox are such interesting investing candidates, courtesy of Morgan Housel's Why Simple Investments Win:

"There's probably never been a time of such staggering technological change as the period from the end of World War II through the early 2000s. Nowhere is that more apparent than the computer industry.

There were no personal computers in 1950. By 1983 there were 13 million. By 2005, 800 million. In 1950, the editors of Time magazine wrote: "Modern man has become accustomed to machines with superhuman muscles, but machines with superhuman brains are still a little frightening." They had no idea.

But the single best stock to own from the 1950s to the early 2000s had nothing to do with computers, or technology in even the loosest sense. It was Altria (NYSE: MO  ) , the maker of Marlboro cigarettes, which returned nearly 20% a year for 50 years. During a period when new industries transformed the lives of nearly everyone in the developed world, the most money was made in a company that stuffed tobacco into paper tubes the way it had for more than a century.

This wasn't a fluke, as more recent years offer a similar example. Measured by the number of PCs added annually, computer growth really took off in the mid-1990s as the Internet became mainstream. There are about 800 million more PCs worldwide today than there were in 1995. One of the biggest winners from this explosion should have been Microsoft (Nasdaq: MSFT  ) , whose operating system the majority of those computers run on. Indeed, Microsoft's profits have grown 16-fold since 1995.

Yet once again, the best stock returns may surprise you. With dividends, Microsoft has returned 511% since mid-year 1995. But Clorox (NYSE: CLX  ) returned 560% during that time -- so bleach actually bested the last leg of the computer revolution. Colgate-Palmolive (NYSE: CL  ) returned 651% over the same period, so toothpaste did, too. As did garlic powder: McCormick returned 642%. Ditto for hamburgers, with McDonald's (NYSE: MCD  ) adding a 540% gain. Hormel Foods produced a 544% gain over the same period, so Spam was actually more profitable than computers during the big boom. Our old friend Altria scored a 1,300% gain, nearly trebling Microsoft's return."

Simplicity is a virtue, and Clorox has this in spades with its bleach, Kingsford charcoal, Glad trash bags and other consumer "have to" brands. One weakness is that international sales only amount to 20% of sales. It could be looked at as an opportunity, too, but right now consumer defensive stalwarts like P&G, Unilever, and Tupperware get the majority of their revenue overseas. Would be good for Clorox to get on this train too. Outside of that the business model looks sound, and Morningstar recently raised Clorox to Wide Moat status. Once we are over that hurdle let's look at the numbers.

The current forward yield is 3% which is just about the minimum that's interesting for income investing.  So its ok, but just ok. The 5 year dividend growth rate is around 10%, however the payout ratio has increased from 42% in 2004 to 61% today. Its FCF cover is under 2x, down to 68%.  The near future looks more like mid to high single digit percent dividend growth and less like double digit dividend growth.

The valuation is a tad on the high side as well P/E is 21. The P/FCF is 17 versus a five year average of 13. That means a fairly rosy future is already baked into the price.

The thing that's most concerning about Clorox is the balance sheet. The Debt/Equity ratio is off the charts - 26! If you did not know anything else about the company, you might think they are insolvent. The good news is the majority of this is long term debt. But the combined effect of the high-ish Earnings and FCF cover and the debt repayments means that prospects for high dividend growth are not likely.

Conclusion, I do agree with Josh Peters that Clorox can likely clear the 5+5 hurdle of a combination of 3% yield and then we just need 7% dividend growth to get over the hurdle. Last year's dividend growth was 6.7% Clorox's future is probably way more like that than it is 10% growth of the last five years. That's good enough to basically clear the 5+5 hurdle just barely. Its not a great buy, certainly not the kind of bargain we have repeatedly seen in the post 2008 world, but a 5+5 simple idea is good enough and good enough is what passes for an interesting candidate these days.

Monday, November 11, 2013

Dividend Compass Cup Final - Microsoft v Baxter

We started with 16 companies, and here we are at the Dividend Compass Cup Final. Among the sixteen were some of the all time great dividend payers like Procter & Gamble, McDonald's, Coca Cola, and IBM. But now we are down to two. Its not a surprise that the two companies left standing represent very attractive industry sectors - software and pharmaceuticals. Both of these industries feature robust profit margins, healthcare and pharma has been paying out dividends for a long time, and now tech is joining the party too.

In fact, one of our finalists, Microsoft was one of the bell cows paving the way for tech giants like Cisco and Apple to institute shareholder friendly dividend policies. It goes to show you that Sherlock Holmes was on to something when he said "There is nothing more deceptive than an obvious fact"; back in the dotcom days tech companies were derided as overpriced, unprofitable and unfriendly to shareholders. yet, Microsoft is here in the Dividend Compass Cup final with an excellent dividend track record.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Microsoft initiated its dividend in 2003 at $0.24/share. Since then its grown 4x over the decade to a $1.12/share forward yield. Granted they started off a low base, but as Sherlock Holmes reminds us, Microsoft is one of the stealth dividend stories of the past decade. And the Dividend Compass shows the stealth dividend story has room to run.

Microsoft metrics
Microsoft delivers on every Dividend Compass category. We've known for decades that software was mega profitable, but Microsoft led the way for its tech peers - turning those profits into dividend income for its shareholders.

Microsoft scores

If we went back a decade and told a group of investors that tech dividends would be a major factor in 2013, I suspect we would have been laughed at. Not so with pharma and healthcare. Dividends have been a big part of that sector for decades.

Over the least decade, Baxter grew its dividend +10% annually, from $0.58/share in 2003 to a forward yield of $1.96/share today. Baxter first paid a dividend in 1980, at that time the PC industry was a curiosity, not the global force it is today. Baxter is a  dividend powerhouse.

Baxter metrics
Baxter is nothing but Good to Excellent from the Dividend Compass point of view.  Its only slip up is the recent FCF coverage issue. Other than that, Baxter is raining perfect 5s.

Baxter score

Baxter has a stellar record, a very strong five year average, but Microsoft is playing a whole different game. Steve Ballmer is retiring, but he can always look back and know that through all the struggles, the Zune, heated competition, mobile, Apple, and all the rest, he closed out his career bringing home the Dividend Compass Cup.

Game, Set, Match Winner: Microsoft.

Sunday, November 10, 2013

Dividend Compass Final Four- Walmart v Baxter

We are down to the second to last match, the second Final Four matchup. In the first match, Microsoft beat out Tim Horton's. Next up, its Walmart versus Baxter.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Walmart had to beat McCormick Spice and Exxon Mobil. Baxter took down Novo Nordisk and CH Robinson. Let's see who emerges victorious and wins the rights to face Microsoft in the Cup final.

Pundits say the recession recovery has been good for Costco shoppers but not so good for Walmart shoppers. Still if this is bad, I am sure most companies would trade for Walmart's operating metrics

Walmart metrics
FCF Cover, dividend growth and ROE are all excellent. About the only important category where Walmart struggles is operatin margin, but here we have the source of Walmart's moat in the first place. Quoting Jeff Bezos "you margin is my opportunity." And that 5% margin is the reason Walmart is one of the very few retailers to withstand the Amazon onslaught.

Walmart scores

Walmart racks up 4.57 five year average. Better yet for its investors, its weak operating margin scores can be seen as a source of enduring competitive advantage.

Baxter delivers strong metrics across the board with a sole but important exception. FCF cover dropped down to under 2x. This is the highest weighted category in the Dividend Compass Cup.

Baxter metrics

The FCF Cover slowdown shows up in bringing Baxter's most score all the way down to 4.45. Still its five average is impressive.

Baxter scores

Baxter did not finish strong, its weakening FCF cover put its most recent period below Walmart's five year average, still Baxter's long term track record is well above Walmart's and that is good enough to get Baxter through to the final where Microsoft awaits.

Saturday, November 9, 2013

Dividend Compass Cup Final Four - TIm Horton's v Microsoft

We started with sixteen companies competing for the Dividend Compass Cup. We are now down to the Final Four. Expect two competitors to bring their A game to this match between Tim Horton's and Microsoft. Both have faced stiff resistance to make it this far. TIm Horton's beat out two all time greats - McDonald's and Coca Cola. Does Timmy's have what it takes to beat yet another titan?

Microsoft's path has giant-laden as well - IBM in round 1 and Procter & Gamble in round 2 - two of the all time great dividend payers with dividend roots back to the 19th century.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Tim Horton's sports robust dividend growth backed by wide FCF cover. This means that investors can reasonably expect the growth to continue.

Tim Horton's metrics

That all translates into a close to perfect score from the Dividend Compass - a 4.95 five year average.

Tim Horton's scores

TIm Horton's numbers speak for themselves. Of course, this is the Final Four. You  do not get this far by accident and Microsoft on the other side has its own strong statement to make including FCF coverage in the 3x-4x range.

Microsoft metrics

This brings Microsoft in to a 4.99 five year average which shows a business hitting on all cylinders.

Microsoft scores

Its hard to see Tim Horton's score and think they could lose, but Microsoft's 4.99 out of 5, carries the day. On top of that Microsoft has 3% forward yield versus Tim Horton's 1.7% yield. In the past, I felt it was a bit unfair to McDonald's and Coca Cola which have much higher yields than Tim Horton's but ultimately lost out. In the future I may restrist the Cup to yields north of a higher percentage. Still, with Tim Horton's in the Cup at all, I could hardly ignore its near perfect score and just like the NCAA final four, its fun to have an underdog make it this far. Beating Tim Horton's requires a near perfect score and Microsoft managed to pull it off today. 

Microsoft is through to the final to play the winner of Walmart and Baxter.

Tuesday, November 5, 2013

Dividend Compass Cup Match 12- CH Robinson vs Baxter

For the final match to determine our Final Four its CH Robinson versus Baxter.  The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

CH Robinson shows dedication to growing its dividend, however its FCF cover is slowing as of late. The company has software-like ROE numbers and a clean balance sheet.

CH Robinson metrics
CH Robinson puts up good marks across the last five years but there is some wear and tear showing. ITs FCF cover is stalled for last two years and this account for a quarter of the Dividend Compass score leaving CH Robinson a notch below a 4.0 score for 2012. Its five year average still clocks in at a respectable 4.27

CH Robinson scores

Over on the Baxter side of the ledger, we see only one area that looks problematic with slowing FCF cover. Otherwise, Baxter is knocking it out of the park on double digit dividend growth and other key areas of the Dividend Compass.

Baxter metrics

Baxter scores many perfect 5s, its five year average is a robust 4.86. Great margins and ROE. Its on a very good run, though investors should continue to pay attention to FCF Cover and slowing earnings cover to see if that is a canary in a coalmine. Other than that, this is a business that reliably delivers the goods for income investors.

Baxter scores

CH Robinson has a good track record, but Baxter is nothing less than great and Baxter is through to the Final Four to face Wal-mart

Saturday, November 2, 2013

Dividend Compass Cup Match 11- Microsoft vs Procter & Gamble

Last match, we had dueling blue chip behemoths Exxon Mobil falling to Wal-mart. This match is old economy versus new economy. Soap versus SOAP. Detergent versus databases. Can Procter & Gamble's heritage which dates to the 19th century fend off the techies from Redmond?

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

History? No contest. Procter & Gamble has paid a dividend since 1890, raising it 57 straight years. Microsoft has paid its dividend since 2003. If its close this will matter, but mainly the Dividend Compass Cup is going to be about the ast five years. Note, this is pretty helpful these days since we're focusing in on ability to weather a generational storm. 

Let's get started - first up please put down your Jolt cola, look up from your debug window, and let's see what kind of metrics Microsoft brings to round 2.

Microsoft metrics:
Microsoft has miles of FCF and Earnings cover, rock solid balance sheet, double digit dividend growth, and lofty ROE. I am not sure what else an income investor could want, and the scores sure show this:

Microsoft score:
Well folks, 4.99 out of 5 is near perfect. I think we can call Microsoft the Nadia Comaneci of the Dividend Compass. How will Procter & Gamble respond? Will its legions of MBAs be able to compete with the creativity and efficiency of Microsoft's army of talented software engineers?

Procter & Gamble is no slouch when it comes to dividends, and they clearly take their dividend policy very seriously.

Procter & Gamble metrics:

Whereas the dividend policy is firmware for P&G, its overall growth is less impressive. Coverage metrics are somewhat tepid. Dividend growth is marching on, but we saw that it will take near perfection to see off Microsoft in this match, let's see the tale of the tape.

Procter & Gamble scores

The P&G performance is plenty good and good enough to beat the vast majority of companies out there, but its not good enough to deal with Microsoft.  A company who is playing on a whole other level these days - margins, ROE, and balance sheet are things Microsoft has always had in its history.  But its decade long dividend track record makes it a formidable candidate for the Dividend Compass Cup. Microsoft is through to the Final Four to play Tim Horton's