Saturday, December 12, 2015

Adding Church & Dwight

I decided to finally add Church and Dwight to the portfolio.  With the market being shaky I want more exposure to sturdy consumer staples. I believe if a recession were to hit in the next 6-18 months stocks of this type will hold up better as big money parks their cash in these assets to ride out the storm. Church and Dwight was founded in 1846 as a baking soda sales company, but now also sells personal care and household products. The company controls the Arm&Hammer brand which is recognized throughout the US.  Additional brands include Trojan, Nair, Oxiclean, and Vitafusion to name a few.  These brands are well known recognized names which continue to generate a lot of cash for shareholders.

The company has provided outstanding results to shareholders the last decade. The stock is up over 355% the last ten years compared to the 57% gain in the S&P 500. This doesn't include dividends which averaged 13% yearly growth over that time, and have shown an actual increase of 466%! Pretty outstanding results. If you are a dividend growth investor(which we like to be as much as possible) that is one outstanding pay raise. While I'm not expecting dividends to grow that much in the next 10 years I expect the returns to be above average. The company pays out 35% of FCF so there is room to increase the dividend over time. The company also has a solid net income profit percentage with the last 3 years coming in right around 12%. The stock is trading on the expensive side as I calculate a total yield of 5.11%. However if I can buy shares at a good discount in the future I'll make additional adds to the portfolio. The company also sports impressive 20% operating margin, ROA of 10%, and ROE coming in at 19%.

The balance sheet is also good. This enables the company to borrow at favorable rates with its highest coupon debt coming in at 3.35%(due 12/15), and the next highest at 2.875%(due 10/22). Additionally the company values it's trade names at $860 million.  If we take all intangible assets & goodwill from the balance sheet that leaves $1.58 billion in assets. It also gives us a ratio of .73 for assets minus goodwill & intangibles divided by total liabilities.  While that ratio is low compared to say WFM which sports a ratio of 2.51, it is not out of line for companies that have valuable brand assets.

Management has also stated the company is continuously looking for strategic acquisitions that provide outstanding return.  The company has so far proven to be very reliable in its acquisitions providing value to shareholders.  In the future I believe the company will provide a good source of stable profits and dividends as consumers generally don't cut back as much on these products as say electronics in rough times. Church and Dwight has also shown how boring products can be immensely profitable.  The shares have been added effective 12/9/15

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