Companies that sell “consumer staples” – the kind of things we typically keep on buying in a recession, like laundry detergent – have been among the few that can look back on the last five years and point with pride to the performance of their shares.
But which of the major U.S. household-products companies posted the best returns? It was not Colgate-Palmolive Co., despite its gain of nearly 50 per cent since October, 2007. It was not Clorox Co. or Kimberly-Clark Corp., despite their healthy double-digit returns. And it was not Procter & Gamble Co., which is actually slightly in the red over the period.
The answer is the lesser-known Church & Dwight Co. Inc., the creator of Arm & Hammer brand baking soda, which has gained a spectacular 130 per cent in the last five years. With gains like these, Church & Dwight is now, by a number of measures, the most expensive of the U.S. household-products conglomerates.
And yet, it has consistently been underestimated by Wall Street – which suggests that while the biggest gains may be in the past, investors should explore whether this dividend growth story fits in their portfolios.
First, a little history: The company remains named after the two men who first developed bicarbonate of soda, or baking soda, in 1846. They eventually named their product Arm & Hammer.
While Arm & Hammer carried the company through its first 150 years, Church & Dwight set out to diversify via acquisition just over a decade ago. Today, it has eight “power brands,” including Trojan condoms, First Response pregnancy-testing kits, Nair depilatories, Oxi Clean laundry additives, and Orajel oral pain relief.
The latest addition, in August, is Avid Health, maker of the Vitafusion and L’il Critters gummy-vitamin brands. Avid Health has been posting annual revenue growth in excess of 25 per cent, and Vitafusion, its adult gummy brand, has gone from zero to $100-million (U.S.) in sales since 2008.
That kind of growth fits in well at Church & Dwight: Over the last five years, it has easily outpaced its aforementioned peers in growth in sales, earnings per share, and EBITDA (earnings before interest, taxes, depreciation and amortization) according to Standard & Poor’s Capital IQ. Its five-year annualized growth rate in EPS tops 15 per cent; Colgate-Palmolive is just below 11 per cent, and the other three companies fall below 5 per cent.
The ballooning earnings have allowed the company to triple its dividend, from 31 cents per share in 2010 to 96 cents per share today, while holding the earnings payout ratio to just 40 per cent, notes analyst Marc Riddick of Williams Capital Group.
In many ways, the secret is out: The company’s forward price-to-earnings ratio approaches 21, while its peers are in the high teens. That valuation gives analysts pause; just seven of 20 have “buys” on Church & Dwight stock, with 10 placing “hold” recommendations and three crying “sell.” Many have target prices at or a hair above the stock’s recent $54 share price.
Pessimists worry about Church & Dwight’s relatively smaller size, as it posts just under $3-billion in sales per year. Colgate-Palmolive and Kimberly-Clark each have revenue around $20-billion, while Procter & Gamble is four times their size. “As a much smaller competitor, Church & Dwight possesses little negotiating power relative to its customers, a particularly daunting position given that Wal-Mart makes up more than 20 per cent of annual sales,” says Morningstar Equity Research analyst Erin Lash, who places a fair value of $42 on the shares.
Williams Capital’s Mr. Riddick, however, notes that in the last 12 years, including 2012 (through early September), Church & Dwight has posted the best annual return among these five household-products companies 10 times. At the same time, it’s had the best average rating from the analysts just once, in 2001.
“The point to take from this is that it is not unusual for investors to overlook the strong performance of this company,” says Mr. Riddick, who has an “outperform” rating and $62 price target. “Despite the success of the management team in delivering superior shareholder value, there are many who have never embraced Church & Dwight.”
It has been their loss, and it may continue to be so.