At $56.64 Clorox is trading within 2% of its 1 year low which is no guarantee of profits however it is a better starting point than the 1 year high. When pursuing a starting point I first like to look at the current earnings compared to the dividend payout. In the case of CLX the trailing twelve month earnings are at $3.33 per share while the dividend payout is expected to be $1.60 annually.
After determining that the dividend is within the sphere of trailing earnings I look at the Valueline metric that indicates where the stock normally trades. In the case of CLX the stock normally trades at around 16x cash flow. This means that when the stock is trading below this measure the shares are undervalue and above this level the stock is overvalue. All that undervalued and overvalued means is that the stock is more likely to rise or decline. According to Valueline of April 4, 2008, CLX is trading at 12x cash flow and is therefore likelier to rise than fall. Keep in mind that according to Valueline during the period from 1981 to 1997, CLX normally traded around 12x cash flow. This indicates that Valueline has raised the level at which CLX is expected to trade around on a cash flow basis.
CLX has increased its dividend for 30 consecutive years in a row at a ten year compounded annual rate of growth of 8.79%. An annual increase of the dividend is management's view that prospects for the company overall are decent at worst and are probably going to get better.
The downside to CLX is that it is heavily indebted which is not going to change soon. Also a negative is CLX's reliance on commodity price movements. As the continued increase in commodities goes on CLX's profit margins will be whittled away. However, if you consider the fact that this company has increased its dividend every year since 1978, during periods of intensive commodity price increases, there is good reason to believe management will get through the threats of commodity inflation. Touc.
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