Sunday, 3 April 2022

2 Undervalued Consumer Staples Offering Value and Income

Consumer staples are often a favorite of income investors because their steady businesses tend to work under any economic backdrop as consumers need toilet paper, cleaning supplies and toothpaste regardless of market conditions. These companies dont often have high rates of growth, but many names have attractive yields and long histories of dividend growth.
There are several consumer staples stocks that are trading well below the intrinsic valuation as measured by GuruFocus. I will examine two top names providing the potential for double-digit price returns in additions to high yields.

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CLX 15-Year Financial Data

The intrinsic value of CLX

Peter Lynch Chart of CLX

The first stock up for consideration is Clorox Co. (NYSE:CLX), a leading provider of household items. The company is valued at nearly $18 billion and generated revenue of $7.3 billion in its most recently completed fiscal year.
Cloroxs products can be used in almost every room inside or outside of the home. Combined with its trusted brands, this gives the company broad appeal to customers who are willing to pay higher prices for the products they trust.
The product portfolio is vast. The company is probably best known for its namesake bleach and cleaning products, which also includes Pine-Sol, S.O.S and Formula 409. What some might not know is that Clorox holds a number of well-known items in its portfolio outside of cleaners and disinfectants. This includes Hidden Valley, KC Masterpiece, Glad and Kingsford. The company also has a lineup of pet products, including Fresh Step and Scoop Away.
The company rode the tailwinds of Covid-19 to see record earnings per share during calendar year 2020 as consumers sought out Cloroxs cleaning products to help protect themselves from the virus. Results have come back to earth slightly as demand has eased as the pandemic has likely reached its peaks. However, Clorox has retained much of the growth seen during that period. First- and second- quarter of fiscal year 2022 sales were down by 8.2% and 5.7%, but were up 16.6% and 19.9% compared to pre-pandemic results for the same period.
Being able to address every area of the consumers home has proven successful over long periods of time, leading to a lengthy dividend growth track record. The company has raised its dividend for 44 consecutive years, making Clorox a Dividend Aristocrat. Shareholders have seen their dividends compound at a rate of 7% annually over the past decade.
Clorox yields 3.3% as of the most recent close, better than the stocks 10-year average yield of 2.8% and well ahead of the average yield of 1.3% for the S&P 500 Index.
Shares of Clorox have fallen more than 18% year to date, but this selloff has put the stock deep into undervalued territory according to the GF Value chart.

2 Undervalued Consumer Staples Offering Value and Income

Clorox closed Fridays trading session at $142.83. GuruFocus forecasts the stocks GF Value is $186.12, giving it a price-to-GF Value ratio of 0.77. Reaching the GF Value would result in a 30.3% gain even before factoring in the stocks generous yield.
The second consumer staple name to discuss is Kimberly-Clark Corp. (NYSE:KMB). Kimberly-Clark has a market capitalization of $42 billion and has annual sales of $19 billion.
Like Clorox, Kimberly-Clark has an enviable portfolio of brands that have caused deep brand loyalty from customers. The companys product lineup includes Huggies, Pull-Ups, Depend, Kotex, Kleenex, Scott and Cottonelle as well as cleaners, sanitizers and wipes used in professional settings.
Kimberly-Clark doesnt have a food business, but does address needs for adults, women, children, babies and the workplace, which provides some diversification within the company. Its products are sold in 175 countries, demonstrating the wide reach of the company.
Despite news stories of widespread paper product unavailability, Kimberly-Clark saw slightly above-average growth during the worst of the pandemic. Revenue grew almost 4% in 2020, but wasnt near the level of Clorox. The one benefit to this more normalized growth was that the company didnt see a steep decline the following year as top-line numbers were up 1.6% in 2021.
Kimberly-Clark raised its dividend slightly less than 2% for the April 4 payment date. The increase, though below the 10-year compound annual growth rate of 4.9%, marked the 50th consecutive year of dividend growth. This qualifies Kimberly-Clark as a Dividend King, of which there are just 40 or so companies with the required five decades of dividend growth to gain entrance into this exclusive group.
The company yields 3.7%, nearly three times the average yield of the market index. The current yield also compares well to the stocks average yield of 3.2% since 2012.
A 12% decline in the stock price year to date means that Kimberly-Clark trades at a discount to its GF Value.

2 Undervalued Consumer Staples Offering Value and Income

Kimberly-Clark recently traded at $125.03. The stock has a price-to-GF Value ratio of $143.07, giving Kimberly-Clark a price-to-GF Value of 0.87. Shareholders would see a 14.4% gain in the share price were it to reach the GF Value. The dividend yield could push the total return in the high teens range.
Final thoughts
The consumer staples sector is often ripe with high-yielding stocks with long histories of dividend growth. Clorox and Kimberly-Clark are two such examples, as both companies have dividend growth streaks that measure in decades and have yields well in excess of what the S&P 500 Index is offering.
Clorox and Kimberly-Clark have seen their respective share prices fall double-digits so far in 2022. The good news is both stocks now trade below their intrinsic values, which could mean double-digit returns for each name. This suggests that investors looking for strong share price return potential in addition to high yields consider adding Clorox and Kimberly-Clark to their portfolio.
This article first appeared on GuruFocus.

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