Dividend aristocrats in focus: Church & Dwight

Updated Feb 3, 2023 by Kay Ng

Dividend Aristocrats are some of the best dividend growth stocks an investor will find. These companies are in the S&P 500 index, with more than 25 consecutive years of dividend increases.

We believe Dividend Aristocrats is among the highest quality dividend growth stocks. For this reason, we created a downloadable spreadsheet of the 68 Dividend Aristocrats, along with important metrics like price-earnings ratio and dividend yield.

You can download the 68 Dividend Aristocrats excel sheet by clicking on the following link:

Every year, we review all of the Dividend Aristocrats. The next stock in the series is consumer staples giant Church & Dwight Co., Inc. (CHD). Church & Dwight may not be as familiar as some of its basic consumer competitors, such as Procter & Gamble (PG), Clorox (CLX) or Colgate-Palmolive (CL); however, it has certainly earned its place on the Dividend Aristocrats list.

Church & Dwight has now increased its dividend for 27 consecutive years. The company’s dividend is also very safe, with a dividend payout ratio of 36%.

At the same time, Church & Dwight shares have been in a long-term bullish trend. However, the stock is down 20% over the last year because it was previously overvalued. It now seems to be, at best, fully valued today.

business overview

Church & Dwight is a diversified consumer staples company that manufactures and distributes products under various well-known names including Arm & Hammer, Trojan, OxiClean, Spinbrush, First Response, Waterpik, Nair, Orajel, and XTRA. The company was founded in 1846, has increased its dividend for 27 consecutive years, and trades with a market capitalization of $19.8 billion with about $5.3 billion in annual revenue.

For more than 100 years, Church & Dwight was a baking soda company that operated solely under the Arm & Hammer brand name. However, since 2001, the Company has acquired 13 of its 14 “power brands.” Church & Dwight’s acquisitions of leading brands have diversified its reach into the home and personal care space. Additionally, Church & Dwight has paid quarterly dividends to shareholders for 122 consecutive years.

Fountain: Investor Presentation

On February 3, 2023, the company reported fourth-quarter and full-year earnings. results by 2022. Total revenue for the quarter was $1.44 billion, up 4.9% from the prior year.

The company experienced organic sales growth of 0.4%. Posted a net loss of -$164.7 million in the quarter primarily from a tripling of its selling, general and administrative (SG&A) expenses, as well as a 5.8% increase in cost of sales, which rose faster than growth of the incomes. Adjusted earnings per share (EPS) fell -3.1% to $0.62 year-over-year.

For the full year, revenue grew 3.6% to $5.38 billion over last year. Income from operations fell 45% to $597.8 million, again due to an 84% increase in selling, general and administrative expenses to $1.1 billion and a 6.8% increase in cost of sales to $3.1 billion . Ultimately, 2023 net income fell 50% to $413.9 million. The large increase in selling, general and administrative expenses was due to $411 million of intangible asset impairment charges related to the Flawless business. Excluding these charges, selling, general and administrative expenses would have decreased 1.4% year-over-year. The company noted that adjusted EPS fell just -1.7% to $2.97.

The company also announced an increase in its dividend. Decreed a 3.8% increase in the quarterly dividend from $0.2625 to $0.2725 per share, equivalent to an annual dividend of $1.09 per share.

Projecting reported sales growth of 5-7% and organic sales growth of approximately 2-4%, Church & Dwight was guided by adjusted EPS growth of 0-4% in 2023. We take the midpoint of this rate of EPS growth to our estimated 2023 Adjusted EPS of $3.03. Over the long term, the company is targeting an 8% EPS growth rate based on organic net sales growth and 3% gross margin expansion.

We expect 6% annual EPS growth over the next five years, comprised primarily of revenue growth and share repurchases.

growth prospects

Although 2020 was a challenging year for the global economy due to the coronavirus pandemic, which greatly affected economic growth, Church & Dwight continued to deliver steady profits. In 2021, the company continued to increase its earnings and the share price continued to rise, with a total return of 17.5% for the full year 2021.

The biggest growth driver for Church & Dwight will be continued organic sales growth and the acquisition of strong brands going forward. The 14 “powerful brands” accounted for 80% of sales and profits in 2021.

Fountain: Investor Presentation

Another growth engine for the company is online sales. For example, last year, 16% of Church & Dwight’s net sales came from online purchases.

Fountain: Investor Presentation

Competitive advantages and performance in recession

Church & Dwight’s competitive advantage stems from its willingness to execute acquisitions and organic sales growth. This growth-by-acquisition strategy provides the company with a lasting opportunity to continue to grow its business for the foreseeable future. CHD is also modestly resistant to recession. For example, Church & Dwight’s competitive advantages allow it to maintain consistent profitability every year, even during downturns.

Church & Dwight’s earnings per share during the Great Recession are as follows:

• 2007 earnings per share of $0.63
• 2008 earnings per share of $0.72 (13% increase)
• 2009 earnings per share of $0.87 22% increase)
• 2010 earnings per share of $0.99 (14% increase)

During the COVID-19 pandemic, earnings increased from $2.47 per share in 2019 to $2.83 per share in 2020. This represents an increase of 15% year-over-year.

Valuation and expected return

Based on expected EPS of $3.03 for 2023, Church & Dwight shares are trading at a P/E ratio of 27.4, using the current share price of ~$83. CHD maintained an average P/E ratio of ~26 during the last ten years. Therefore, we think a fair earnings multiple is 26.0. Consequently, based on their average valuation multiples, Church & Dwight shares appear to be overvalued.

If the company’s stock experiences a decline in the valuation multiple of our fair P/E of 26.0, it will reduce annual shareholder returns by 1.0% per year for the next five years.

Earnings growth and dividends will have a positive impact on future returns. First, we expect the Company to increase earnings per share by 6% per year through 2028.

Finally, CHD shares have a dividend yield of 1.3%. Putting it all together, a breakdown of our expected future returns is as follows:

• 6.0% expected earnings per share growth
• 1.3% dividend yield
• -1.0% negative return due to valuation contraction

In this projection, total shareholder return could reach 6.2% annualized through 2028.

final thoughts

Church & Dwight has many of the characteristics of a high-quality dividend investment. In particular, the company’s portfolio of brands allows it to grow its earnings in most years, no matter where we are in the economic cycle. In addition, Church & Dwight shares its growth with its shareholders through constant dividend increases.

The company’s strategy of growth through acquisitions has been proven and its management team has developed considerable experience scaling smaller brands through its existing infrastructure. Occasionally there would be slip-ups that led to impairment charges as we saw last year, but it shouldn’t be seen as the norm.

At the end of the day, the stock’s valuation is just above fair value. We forecast cumulative total returns to be 6.2% per year, consisting of 6% earnings growth, a 1.3% dividend yield, and 1.0% headwind from valuation. Stocks get a hold rating.

Additionally, the following Sure Dividend databases contain the most trusted dividend generators in our investment universe:

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