The Dividend Achievers Index includes 238 businesses (at the time of this writing) that have increased their dividend payments for 10 or more consecutive years. To be eligible for inclusion in the Dividend Achievers Index, a stock must be a member of the NASDAQ US Benchmark Index, as well as meet certain minimum liquidity requirements. Over the next several months to a year, I will analyze each of the businesses in the Dividend Achievers Index to determine each company’s competitive advantage (or lack thereof), future growth prospects, and current events.
The Dividend Achievers index is an excellent place to look for high quality businesses with shareholder-friendly managements. Increasing dividend payments for 10 or more consecutive years requires a business have strong cash flows and a management team that is willing to reward shareholders through continuously rising dividend payments. The 10-year history includes the Great Recession of 2007 to 2009; all Dividend Achievers managed to raise their dividend payments throughout the Great Recession.
The first Dividend Achiever I will analyze is Arm & Hammer producer Church & Dwight (CHD, Financial). Church & Dwight was founded in 1846 and has grown to a market cap of over $10 billion over the last 160+ years. The company has not reduced its dividend payments since it started paying dividends in 1990. Church & Dwight will have reached 25 consecutive years of dividend payments without a reduction by 2015. This means as of January, it will pass the first of The 8 Rules of Dividend Investing, which is a stock can have no dividend reductions in the last 25 years. This rule sets the bar for safety and consistency very high; two facets of high quality businesses which are too often ignored. Church & Dwight’s business operations are analyzed below.
Business Overview
Church & Dwight generates about 60% of its profits from four key brands: Arm & Hammer, OxiClean, Trojan, and VitaFusion/Lil’Critters vitamins. In addition, the company owns the following brands: Xtra laundry detergent, First Response pregnancy kits, Nair hair remover, Spinbrush, and Orajel. Church & Dwight breaks its operations down into three separate categories. Each category is shown below along with the percent of total sales each segment has generated for Church & Dwight through the first nine months of fiscal 2014:
- Consumer Domestic: 75% of sales
- Consumer International: 16% of sales
- Specialty Products: 9% of sales
The Consumer Domestic segment sells Church & Dwight’s strong consumer brand products in the US. The Consumer International segment sells the company’s consumer brand products outside the US. The Specialty Products segment produces and sells sodium bicarbonate (baking soda) and other inorganic chemicals for industrial, institutional, and medical applications.
Competitive Advantage
Church & Dwight’s competitive advantage comes from its strong brands. The company supports its brands through high marketing spending. Church & Dwight spent nearly $400 million on marketing and advertising in its full fiscal 2013; 12.5% of total revenue. Interestingly, Church & Dwight has spent the 13th most on advertising in the US from 2011 through 2013, ahead of much larger consumer product companies like: Coca-Cola (KO, Financial), Kimberly-Clark (KMB, Financial), and Colgate-Palmolive (CL).
Church & Dwight’s advertising budget has widened the company’s competitive advantage by increasing brand market share and awareness. The image below shows the leading position many of the company’s brands enjoy:
Source: Church & Dwight Back To School Conference Presentation
Church & Dwight’s strong brand portfolio was largely built over the last 15 years. The company acquired 8 of its top 9 brands since 2001. Church & Dwight has built its brand portfolio from cash flows generated from its flagship Arm & Hammer brand. Church & Dwight acquired its other strong brands since 2001:
- Trojan acquired in 2001
- Xtra acquired in 2001
- Nair acquired in 2001
- First Response acquired in 2001
- Spinbrush acquired in 2005
- OxiClean acquired in 2006
- Orajel acquired in 2009
- VitaFusion & Lil’Critters vitamins acquired in 2012
Church & Dwight has not just acquired these brands. It has acquired them and significantly increased their market share. The company’s advertising department and management teams ability to significantly grow market share of acquired brands shows a unique competitive advantage that will fuel the company’s growth. Church & Dwight’s advertising and marketing department has managed to grow its brands’ market share significantly over the last 15 years as the picture below shows:
Source: Church & Dwight Back To School Conference Presentation
Future Growth Prospects
Church & Dwight’s future growth will be driven by bolt-on acquisitions, large high impact acquisitions, organic growth in the company’s core brands, and continued expansion internationally. Despite its high advertising spending and market leading brands, Church & Dwight has grown revenue per share at under 6% a year over the last decade. Earnings per share grew at about 14% over the same time period as the company has realized significant margin improvements. With that said, margin improvements cannot happen indefinitely in competitive markets as industry wide efficiency gains are offset by lower prices from competitors, which eat margin gains. I don’t believe the company can sustainably increase margins at the rate at which it has in the past indefinitely.
Church & Dwight’s revenue per share growth rate has been affected by share issuances. In 2000, Church & Dwight had 115.13 million shares outstanding. By 2010, the company had over 140 million shares outstanding; share issuances dilute long-term shareholders percentage of ownership in the company, reducing value. Since 2010, Church & Dwight has been a net share repurchaser, however. The company has reduced its share count by about 6.5% since 2010.
As mentioned above, a potential growth driver for Church & Dwight is bolt-on acquisitions. An example of one such acquisition is the company’s recently announced purchase of Varied Industries Corporation. Varied Industries Corporation has annual sales of about $25 million (adding about 0.8% to Church & Dwight’s current sales) and is the leader in yeast-based cow nutritional products for stomach care. The acquisition will bolster Church & Dwight’s Specialty Products segment. While bolt-on acquisitions will not be the company’s primary growth driver, management has shown they are adept at integrating new brands and products into Church & Dwight.
Much of Church & Dwight’s growth over the last 15 years has come from strengthening acquired brands. The company’s management is “actively pursuing” new acquisitions. I have no information on what brands the company is pursuing, but believe long-term shareholders will benefit as the company pursues its strategy of growth through enhancing acquired brand market share.
Church & Dwight has grown its percentage of revenue from international markets substantially over the last decade. The company is focusing on increasing sales outside the US to better diversify its revenue away from just one country. Church & Dwight currently generates about 16% of sales internationally. In 2001, the company generated just 2% of sales internationally. Church & Dwight is approaching international growth selectively. The company generates about 70% of its international revenue in Canada, the UK, and France. Church & Dwight has a long growth runway ahead as it slowly expands its international presence.
Going forward, I expect Church & Dwight to grow EPS at 5% to 8% a year. The company should generate this number through organic growth (3% to 4% a year), share repurchases (2% a year), and margin improvement (0% to 2%) a year.
Dividend Analysis
Church & Dwight has not reduced its dividend payments since 1990. The company has a long history of rewarding shareholders through dividend increases. Church & Dwight stock currently has a dividend yield of just 1.6%, below the S&P 500’s dividend yield of about 1.8%. The company has a fairly low payout ratio of about 43%. Church & Dwight has boosted its dividend payments considerably in recent years. The company had dividend payments of just $0.23 a share in 2009 versus $1.24 a share now. I expect Church & Dwight to continue growing its dividend payments faster than overall company growth as its payout ratio continues to rise.
Valuation
Church & Dwight currently has a high P/E ratio of 26.4. The company’s stock is currently trading at a 36% premium to the S&P 500’s P/E ratio of 19.4. The company has traded at about a 15% premium to the S&P 500’s P/E ratio over the last 5 year. I believe Church & Dwight to be somewhat overvalued at this time based on its P/E ratio relative to the S&P 500’s P/E ratio.
Recession Performance
Church & Dwight performed well through the last recession of 2007 to 2009. The company’s management makes a point of focusing on recession resistant brands and products. This in turn has helped Church & Dwight to grow regardless of the overall economic environment. The company managed to grow EPS each year of the Great Recession of 2007 to 2009. The company’s EPS through this time period are shown below to illustrate how well the company performs during recessions:
- 2007 EPS of $1.23
- 2008 EPS of $1.43 (16% increase)
- 2009 EPS of $1.74 (22% increase)
Final Thoughts
Church & Dwight is a high quality business with a shareholder-friendly management in place. The company has a strong competitive advantage from its advertising and marketing spending and built up customer goodwill. Church & Dwight has proven it can grow earnings both in economically prosperous times and recessions. Unfortunately, Church & Dwight appears to be overvalued relative to the S&P 500 at this time. Compounding this, the S&P 500 is above its historical P/E ratio, making Church & Dwight overvalued on both a relative and absolute basis. The company’s below average dividend yield does not help either.
Church & Dwight receives a mediocre grade using The 8 Rules of Dividend Investing due to its above average P/E ratio, and below average yield. The company is a hold at this time. Investors seeking dividend growth and stability would do well to watch the company’s stock and wait for a downturn to initiate a position. In summary, I believe Church & Dwight is a fantastic business, but is not a fantastic stock at this time due to its relatively high P/E ratio.
