S&P 500 Dividend Stock Shows 33% Decline; Long-Term Investment Potential, According to The Motley Fool

S&P 500 Dividend Stock Shows 33% Decline; Long-Term Investment Potential, According to The Motley Fool

Life is like a sine curve, with good times followed by bad times, and vice versa. That’s how it goes for companies, too. Right now Clorox (CLX -0.27%), a member of the consumer staples segment in the S&P 500 index, is in a down swing. The stock is more than 33% below its 2020 high-water mark. That’s pushed the yield toward the high end of its historical range, to around 3.2%.

Now is the time to consider adding this dividend stock to your portfolio, but before you do, it’s worth understanding why Clorox is so far from its highs.

Clorox gets hit and then hit again

The pain at Clorox actually started as a positive. During the early days of the coronavirus pandemic, when consumers had a heightened focus on cleaning, Clorox products were flying off the shelves. In fact, the company was having a hard time keeping up with demand. It even brought in high-cost contract manufacturers to ensure it could produce enough to keep retailers’ shelves full.

Demand fell off as the world began to adjust to the illness. And, at the same time, supply chain disruptions and inflation hit. Falling demand, rising costs, and the lingering impact of the contract manufacturing relationships it created resulted in a steep decline in Clorox’s margins. Investors punished the stock. It didn’t help that management was clear from the get-go that a recovery would likely take a few years.

But the consumer staples icon made good on its promises, cutting costs, exiting contract manufacturing relationships, and increasing prices. Margins began to improve. And then there was an IT security breach that basically forced Clorox to use pencil and paper to track its business. This further delayed the recovery process, though the company says it is finally back to, effectively, normal operations.

Given this list, it makes sense that Clorox stock is in the doldrums. But the weak stock price has pushed the dividend yield, currently around 3.2%, up toward the high end of the historical yield range. For long-term investors this S&P 500 stalwart is worth a closer look, noting that there are a lot of things to like here despite the negatives.

CLX data by YCharts

A few positives about Clorox

The dividend yield is currently more than twice that of the S&P 500 index. And it is above the 2.5% or so of the average consumer staples maker, using the Consumer Staples Select Sector SPDR ETF as an industry proxy. In this way it is an attractive stock for income investors.

Clorox has increased its dividend annually for a huge 46 consecutive years. That’s not a record you create by accident. The annualized dividend growth rate over the past decade, meanwhile, is a solid 6%. To be fair, more recent increases are in the low single digits, but that makes sense given the current headwinds Clorox is facing. When times improve, dividend growth is likely to improve as well.

CLX Gross Profit Margin Chart

CLX Gross Profit Margin data by YCharts

As for the business, the gross margin trend has reversed course. Notably, as the chart above shows, gross margin is now well above the 2022 lows. Yes, there’s still room for improvement, but even the IT breach didn’t materially derail the company’s performance turnaround. That should be particularly comforting for investors, as it speaks to a strong management team and a strong business plan.

Lastly, Clorox has been creating new innovations and rolling them out in stages. The company has always leaned hard on innovation, but the current approach assures that research and development investments produce multiyear growth. An example of this is scented cleaning products, which allow the company to bring out new fragrances over time. That may not sound exciting, but Clorox gets to use words like “new” and “improved,” which usually gets consumers into a buying mood.

A strong buy and hold

It would probably be appropriate to describe Clorox as a “fallen angel” — that is, a very well-run company that has, likely on a temporary basis, fallen on hard times. If you act now, while this reliable dividend stock is still far off its most recent highs, you can collect a historically attractive 3.2% dividend yield. Don’t focus so much on the negatives that you miss the positive developments that are starting to take shape.

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