Church and Dwight – is this a good dividend growth investing buy?

Background

This is a small firm (22B market cap) that focuses on the household products sub-category of GICS. They have a range of strong and loved brands, mostly in the cleaning (fabric and home care), personal care, and health segments. These are all requirements that most people are not going to shift from. Most consumers develop strong preferences for brands, giving the firm a high degree of protection against consumers switching brands.

Dividends and the opportunity for dividend growth investing

The DGR has been good, over time, but in recent years (3 years) it has decreased to about 5%

How safe is the dividend? It is exceptionally well-covered by the free-cash-flow (FCF) of the company and this is valuable for dividend growth investing. The FCF generally increases year-on-year (with the noticeable post-covid dip!) as we can see from Figure 1. It is far higher than the dividend payouts, providing me with confidence in my dividend growth investing that the firm has the opportunity and capability to continue to pay out the current dividend and increase the payouts in the future.

CHD - dividend growth investing history
Figure 1. CHD – dividend growth investing history. Historical Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved

Earnings growth for the dividend growth investor

The analyst scorecard here is a thing of beauty – the expectations are hit on both the one and two-year estimates each time for over a decade. This gives a high degree of confidence in the near-term forecast earnings growth (below) of 8.8% in 2023 and 7.8% in 2024.

How has the company performed in the past? In a word – beautifully! The earnings have increased steadily like clockwork as we can see on Figure 1 and this is what the dividend growth investor wants to see. In general, and with this type of company, that is the type of progression I enjoy seeing.

We can also see that the future earnings estimates for dividend growth investors are relatively stable; the analyst earnings estimate revisions do not change substantially, as we can see at the bottom of Figure 2.

CHD - dividend growth investing forecast
Figure 2. CHD – dividend growth investing forecast. Historical Graph – Copyright © 2011-2022, F.A.S.T. Graphs™ – All Rights Reserved

Valuation

So – there is a lot to love here. So – is it time to take a position?

CHD is presently trading with a blended PE of approximately 30x (Figure 1). That is high and particularly so for a consumer staples firm. It speaks to the high regard with which investors hold the company and the stability it provides. However, in my mind, this suggests substantial downside risks here if I were to invest today. If I assume that earnings are held constant, a PE of 30x could happily decrease to 15x and wipe out half of my capital. If I were to buy here, I would be praying and hoping that other investors continue to support the price of the stock with constant purchases and continued faith. If something happened to shake this confidence, stock prices could tumble and leave me exposed to substantial capital losses. As a risk-averse fellow, this lack of margin of safety is not comfortable.

There is a dividend of just over 1%. It completely does not provide any meaningful buffer for a dividend growth investor to this type of capital destruction if the PE was to reduce with a reduction in prices.

I wouldn’t be taking a position in the company as a dividend growth investor. However – as you can see from the analysis, I am keen on the company, and I like the small size and overall holistic quality of the company. I will be keeping this on my radar and if there is ongoing or long-term market turmoil or a short-term price drop, this is certainly an option for me to swoop in and pick up some shares at a good price.

At what price would this be interesting? It is currently at about $92 and 30x PE; I would want to see it at half that at just over $45/share and a PE of 15x. I could consider starting a position at about 20x PE, about $65 a share, but this still likely has too much downside and an insufficient margin of safety for me as a careful dividend growth investor.

Thesis

This is a wonderful company but currently trading at too high a price for a cautious dividend growth investor. I continue to keep a close eye on the opportunities to buy this closer to $45, where I believe I will have the opportunity to partake in the business’s growth and benefit from the long-term compounding nature of the investment.

Background This is a small firm (22B market cap) that focuses on the household products sub-category of GICS. They have a range of strong and loved brands, mostly in the cleaning (fabric and home care), personal care, and health segments. These are all requirements that most people are not going to shift from. Most consumers…

Background This is a small firm (22B market cap) that focuses on the household products sub-category of GICS. They have a range of strong and loved brands, mostly in the cleaning (fabric and home care), personal care, and health segments. These are all requirements that most people are not going to shift from. Most consumers…

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