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Will Clorox Help You Retire Rich?

Wednesday - 4/10/2013, 11:10pm  ET

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether Clorox makes a great retirement-oriented stock.

Clorox is well-known for its stable of consumer products, including its namesake bleach as well as a variety of other cleaning, personal care, and household products. But given the stock's popularity, is it still a good value for investors? Below, we'll revisit how Clorox does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Clorox.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$11.4 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

3 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.38

Pass

 

Worst loss in past five years no greater than 20%

(12.1%)

Pass

Valuation

Normalized P/E < 18

22.22

Fail

Dividends

Current yield > 2%

2.9%

Pass

 

5-year dividend growth > 10%

10.8%

Pass

 

Streak of dividend increases >= 10 years

35 years

Pass

 

Payout ratio < 75%

57.5%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Clorox last year, the company has picked up a point, as its market cap has risen well beyond the $10 billion mark. The stock's strong performance is to blame for that, with the share price having risen more than 25% over the past year.

Clorox is one of the best companies in America, and its long-term performance shows why. With 90% of its products ranking in the top two for market share in their respective categories, Clorox doesn't have the broadest product line, but it definitely has the depth to compete in the areas where it has chosen to stand its ground.

Moreover, it's starting to appear that Clorox has weathered a tough part of its business cycle. Throughout the industry, Procter & Gamble , Colgate-Palmolive , and Clorox all had to deal with rising costs for the inputs they needed to make their respective products. The companies responded by implementing price-cutting measures and passing on part of their higher costs to their customers. For its part, Clorox was able to expand its gross margins by a full percentage point, with a worse-than-normal flu season contributing to sales. Now that input-cost inflation is easing, P&G and Clorox expect to see better profitability, with growth starting to approach the faster rates that Colgate has enjoyed.

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