Stocks & Markets

'Boring' Clorox Excites Wary Investors


The cleaning products made by Clorox (CLX) can kill microbes and erase grime with a single swipe of the sponge. But the Oakland (Calif.)-based company—which has climbed 9.3 percent in the stock market this year, vs. a 0.9 percent rise in the Standard & Poor's 500-stock index—has the least-volatile shares around.

Volatility is a measure of how much a stock's price varies day-to-day. In 2010, Clorox has registered a volatility measure of 12.5, according to Bloomberg data. That is lower than any other stock in both the broad Russell 3000 index and in the S&P 500.

Clorox offers investors "no drama," says Jefferies & Co. analyst Douglas Lane. "It's a Steady Eddie kind of performance."

By contrast, the average volatility reading in the S&P 500 is 32.2, while the index's most volatile stock, Eastman Kodak (EK), has a reading of 76.5. So far in September, Eastman Kodak shares have risen or fallen by more than 3 percent on six different trading days. The last day Clorox's share price varied by more than 1 percent was on Aug. 19.

The stability of the stock owes much to the consistency of Clorox's business results, analysts and investors say.

"we've done a pretty good job"

The company's sales grew by just 2 percent in the fiscal year that ended in June. Yet on Sept. 9, Clorox Chairman and Chief Executive Officer Don Knauss cited the 2 percent growth when he declared the past 12 months a "very good year."

"We feel like we've done a pretty good job of protecting our shareholders' interest over this recessionary period," Knauss said at an investor conference.

Investors agree, having driven Clorox's stock up 17 percent in the past 12 months. Factor in the dividend and Clorox's stock has returned 21.3 percent over the past 12 months. The dividend yield now stands at 3.3 percent—and Clorox has boosted its dividend payout to shareholders every year since 1977. On Sept. 14, the stock closed at 66.94, its highest close since June 2007; it finished at 66.65 on Sept. 17.

In tough economic times, "any positive sales growth is considered attractive," says Peter Andersen, portfolio manager at Boston-based Congress Asset Management. Clorox can turn in predictable results because of a "very reliable,—albeit boring,—portfolio of products," he says.

Clorox says more than 80 percent of its products are the strongest or second-strongest brands in their categories. Brands include Hidden Valley Ranch and KC Masterpiece sauces, Brita water filters, Burt's Bees personal care products, Kingsford charcoal, Glad trash bags, and cleaning products such as Pine-Sol, Liquid Plumr, Tilex, and Clorox bleach.

2011 sales growth: at least 2 percent

With so many top brands, "we tend to win in this environment," Knauss said. "It's the third- and fourth-tier brands that lose."

Following 2 percent sales growth in fiscal 2010 and 3 percent the year before, Clorox estimates sales growth in fiscal 2011 will come in "most likely at the lower end" of the 2-percent-to-4-percent range.

That's fine with skittish investors seeking dependable equities, Andersen says. "The environment right now is very uncertain," he says. "We don't have a clear path to recovery." With strong finances and "low business risk," Clorox is a "pretty safe stock to be in right now."

Clorox is part of the consumer staples sector known for its ability to hold up, even in a slow economy. Still, the S&P's consumer staples sector gain has lagged Clorox's by 5 percentage points this year.

One advantage for Clorox this year has been its heavy presence in the U.S. and light presence overseas, Lane says. Clorox's international division accounted for 21 percent of sales last year, while 58 percent of revenue at Cincinnati-based Procter & Gamble (PG), the world's largest household products maker, came from outside North America.

Little exposure to euro's instability

Overseas exposure hurt international companies such as Procter & Gamble, Lane says, because in 2010 currencies have been volatile and investors have worried about the prospects for continued growth in both emerging markets and Europe.

Among the most volatile currencies has been the euro, which fell 16.7 percent against the U.S. dollar from the start of 2010 to June 7, hurting the value of Europe-derived profits when brought back to the U.S. The European currency has since rebounded 9.4 percent. For Clorox investors, such swings were a minor concern. Europe and the Middle East represent just 6 percent of Clorox's international sales.

The factors that make Clorox attractive to investors now could become disadvantages in the future. "While predictability has been a positive over the last year, I think the market over the next year is going to look elsewhere for growth," says Lane, who rates the stock a "hold." Clorox's reliance on the U.S. consumer could be a problem if the economy remains weak. "Consumers are going to be challenged [for] the foreseeable future," he says.

Clorox's profits have been rising faster than sales, with earnings per share up 12 percent in fiscal 2010—and 17 percent the year before. Rising raw materials prices could soon hurt Clorox's profit margins, Lane says. According to producer price data from the U.S. Labor Dept., the cost of plastic resins—a key ingredient in many household cleaners and other products—was up 10.1 percent in August from a year earlier.

Congress Asset Management's Andersen doesn't own Clorox shares because he is betting on a strengthening U.S. recovery and seeking stocks with greater growth potential. While a less-volatile stock does well when the broader market is weak, he warns that Clorox could lag when the market recovers.

"Low volatility cuts both ways," he says.

Steverman is a reporter for Bloomberg News in New York.

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