Church and Dwight (CHD) Dividend Stock Analysis

Summary

Church and Dwight Co., Inc., maker of Arm and Hammer and Trojan, among other brands, is an aggressively growing mid-cap household and personal products company.
-Revenue Growth: 9% annually
-Earnings Growth: 20.5% annually
-Cash flow Growth: 29% annually
-Dividend: Currently yields only 0.83% but boasts 20% annual dividend growth.
-Balance Sheet: Strong
-Valuation: In my opinion, worth purchasing under about $63.

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Overview

Church and Dwight Co., Inc., (CHD) is the market leader in the production of sodium bicarbonate (baking soda), through their primary brand Arm and Hammer. In addition, CHD boasts other top brands like Trojan Condoms, Brillo pads, Orajel, OxiClean, Nair, First Response, and Xtra. Ten years ago, CHD was primarily driven by its brand Arm and Hammer, but has since made a series of successful and highly profitable acquisitions, producing an outstanding 10-year return to shareholders. The company has a 162 year operating history.

Revenue, Earnings, Cash Flow, and Margins

The company has had an outstanding decade, and has even done well during the market crisis. Adjusted for a dividend split, shares are trading for more than six times what they were ten years ago due to a series of successful acquisitions.

Revenue Growth

Year Revenue
2009 $2.521 billion
2008 $2.422 billion
2007 $2.221 billion
2006 $1.946 billion

CHD has grown revenue by 9% per year for the past three years.

Earnings Growth

Year Earnings
2009 $243.5 million
2008 $195.2 million
2007 $160.0 million
2006 $138.9 million

Annualized, that is an impressive 20.5% earnings growth rate over the past three years. This is especially impressive considering the horrid economic environment during the time.

Cash Flow Growth

Year Cash Flow
2009 $401.0 million
2008 $336.2 million
2007 $248.7 million
2006 $186.4 million

Cash flow for CHD has grown by a monstrous 29% per year during the past three
years.

Margins

CHD currently has a net profit margin of 9.6%. This is an improvement over its 5-year average net margin of 8%. Its competitors, Proctor and Gamble, Colgate-Palmolive, and Clorox, however, all have higher profit margins of 14%, 11%, and 15% respectively. Church and Dwight has been restructuring and cost-cutting over the last few years, and I expect their profit margins to continue increasing. Clorox and Proctor and Gamble have both seen reduced net profit margins over the same time period that Church and Dwight has been improving their margins.

Dividend Growth

Church and Dwight currently has a dividend yield of 0.83%. Obviously this is not a good investment choice for someone planning to use dividends for current income. The company, however, has been rapidly increasing their dividends over time.

Dividend Growth

Year Dividend Yield
2009 $0.46 0.78%
2008 $0.34 0.62%
2007 $0.30 0.65%
2006 $0.26 0.71%

Annualized, CHD has grown dividends by 21% per year over the past three years. The payout ratio is currently 13%, leaving plenty of room for dividend growth.

Balance Sheet

The balance sheet is strong. CHD has a current ratio of 1.6 and a LT Debt/Equity ratio of 0.37. CHD is only moderately leveraged. In addition, long term debt decreased from $781 million in 2008 to $567 million in 2009.

Investment Thesis

Point 1- Best in Class

CHD is a premium company with top brands. It seems fitting to compare it to its primary competitors: Proctor and Gamble, Colgate-Palmolive, and Clorox. Here’s the show:

Church and Dwight:
P/E: 19.51
2010 expected EPS growth: 14.3%
2011 expected EPS growth: 11.3%
Dividend Yield: 0.83%
LT Debt/Equity: 0.37
Market Cap: $4.72 billion

Clorox:
P/E: 14.89
2010 expected EPS growth: 6.3%
2011 expected EPS growth: 9.7%
Dividend Yield: 3.30%
LT Debt/Equity: 90.2 (and total liabilities slightly exceed total assets)
Market Cap: $8.64 billion

Colgate-Palmolive:
P/E: 18.53
2010 expected EPS growth: 11.2%
2011 expected EPS growth: 9.9%
Dividend Yield: 2.20%
LT Debt/Equity: 0.96
Market Cap: $41.55 billion

Proctor and Gamble:
P/E: 16.49
2010 expected EPS growth: -3.1%
2011 expected EPS growth: -1.2%
Dividend Yield: 2.80%
LT Debt/Equity: 0.33
Market Cap: $185 billion

Clorox is full of debt. It’s liabilities exceed assets. They have solid growth and a decent dividend, but the debt is big flaw.

Colgate-Palmolive is similar to CHD, but has a larger yield with smaller growth and a similar valuation, and more debt than CHD (though not as much as Clorox).

Proctor and Gamble, the largest of the four, has the strongest balance sheet but predicted earnings decreases over the next two years.

Church and Dwight (CHD) is the smallest company and the fastest growing company, and has the second strongest balance sheet. Its also trading at the highest valuation and pays the smallest dividend. It has also had by-far the best performance of the four over the last ten years.

Point 2- Acquisition

CHD has been accumulating cash over the last few quarters. The company currently has $447 million in cash and cash equivalents. This is up from $419 million in September 2009, $357 million in June 2009, and $280 million in March 2009. None of the previous 3 years year-ending cash balances exceeded $250 million.

Based on their operating history, I expect that they’re preparing for another acquisition. This is great, because Church and Dwight has been exceedingly good at picking smart acquisition targets to fuel their market-crushing returns over the past decade.

Selected Historical Acquisitions:
2001: Xtra, leading value laundry brand, Trojan Condoms, leading condom brand in US, and Arrid and Nair
2003: Mentodent and Pepsodent oral care
2006: Oxiclean, Orange Glo, Kaboom
2008: Orajel, helped boost profit margins

Point 3- Conservative Promise

Out of the past 5 quarters, CHD has exceeded analyst earnings estimates 4 times. The single time that they did not beat estimates, they did land at the very top of those estimates. This is a plus considering that the estimates for the next two years are already rather attractive in terms of growth.

Risks

CHD faces commodity cost and currency risks. Also, since CHD stock is not cheap at the moment, there is the possibility for short-term share price decreases due to decreased investor confidence in the company. Any negative news will damage their recent stock price run-up. Overall, CHD is well-buffered against the economy due to the fact that they have both top brands and deep value brands.

Conclusion and Valuation

For me, CHD is a hold as of this writing. I purchased shares of CHD at $58 and now they are up to over $68 a few months later, which I think is a bit pricey, but I still have a bullish view of the company going into the next decade.

The company has excellent growth prospects going forward, a meager but growing dividend, strong brands (and deep value brands), and a relatively conservative balance sheet. They’ve made smart acquisitions in the past decade and are likely to continue this trend. Id like to see their PE/G ratio drop below 1, but that’s unlikely and I’d be willing to pay a bit of a premium for this company considering their competitive advantage, small but growing dividend, recession-resistant products, and their moderately low debt. To me, the company would be a solid buy again this year if the price drops below $63. This is a boring but profitable company, and won’t make anyone rich quick over the short-term, especially due to it not being a cheap stock at the moment. I do, however, think very highly of this company over the long run.

Full Disclosure: Long CHD
You can see my full list of individual holdings here.

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Comments

  1. I’m not sure about this one – the dividend is very low even after the increases. But you make a good case based on the performance of the company over the last few years.

  2. Tim,

    Thanks for your point of view. This is not a company I consider to be much of a dividend stock. I do, however, think it’s a great company, and it’s in my portfolio and I’m trying to do an analysis on most of my portfolio stocks. As mentioned in my analysis, I don’t think it’s at a great entry price right now, but would keep an eye on it to see if it goes a bit lower. My cost basis in the company is much lower than the current price, and I wouldn’t buy more shares at the current price, but wouldn’t sell either.

    Past performance of a company is of moderate importance for the sake of reference, but of course shouldn’t be taken too seriously since the future is what matters most. Past performance of the management, however, is very important to me. The head of the company, Mr. Craigie, has been CEO since 2004 and has overseen this company’s tremendous growth over the last several years by making smart acquisitions. He’s also tripled the small dividend over that time period. My holding period in this company is intended to be a very long time, but as for the short term, I agree that there are better choices out there unless this one has a price decrease this year.

    I try to keep my portfolio balanced with different levels of risk. As mentioned in my About page, my overall portfolio strategy is to have the core of my portfolio consist of dividend growth companies and to have a small part of my portfolio consist of smaller, fast growing companies that may or may not pay a dividend. Currently, CMFO is my pick for that second category, along with NPK and CHD that fall into both categories. CHD, despite the growth, for me is not so much a growth stock as it is a stability stock for my portfolio, as it has shown to be highly resistant to economic downturns since it has both necessary premium brands and inexpensive value brands.

    Thanks again for your contribution. I hope to hear more of your thoughts on future stock analysis.

  3. Thanks for bringing this company to my attention. Looks like a “cash cow” type of biz with tremendous marketing skills. [My only absolute requirement is a dividend must be paid, and therefore I’m open to low payers like CHD.]

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