Key Points
Church & Dwight has built an empire on simple products that dominate their markets.
Acquisitions can be risky, but strong management has made them pay off.
The stock looks expensive, but sometimes you get what you pay for.
You’ve probably used sodium bicarbonate at least once in your lifetime — or as most people refer to it, baking soda. The versatile product has an impressive range of uses from cleaning the bathroom to baking in the kitchen and — for those students out there — making volcanos erupt in science class.
When people reach for baking soda, they’re likely using the Arm & Hammer brand made by consumer-staples stalwart Church & Dwight ( NYSE:CHD ). Interestingly, there’s nothing proprietary about baking soda — it’s a chemical compound that anyone can make. Yet I can’t think of a different baking soda than Arm & Hammer.
The 175-year-old company seems to have a knack for offering products that are very useful and straightforward. Its excellence as a business boils down to a few such critical points that have served investors well — and I believe will continue to do so. An ever-expanding portfolio
The versatility of baking soda is reflected in the different ways that Church & Dwight sells the Arm & Hammer brand. You can get just a plain box of Arm & Hammer baking soda, but you can also get Arm & Hammer laundry products, cleaning products, toothpaste, cat litter, and more. Image source: Getty Images. Meanwhile, Church & Dwight has steadily expanded its business to go well beyond baking soda, using the profits from its Arm & Hammer brand for years to acquire new brands. Today, the company derives 80% of its total sales from 14 “power brands,” and all but Arm & Hammer were acquisitions.
Church & Dwight focuses on specialty products with a high market share in their category. For example, its “Lil Critters” brand proclaims itself the leading gummy brand for children’s vitamins. Other well-known products include Trojan Condoms, Oxi Clean, and Nair. Acquisitions mean that Church & Dwight can continue growing and creating value for shareholders. The company’s revenue has grown at a 6.5% annual rate over the past 10 years. High-quality management
Acquisitions are a standard growth tool for many corporations, but they carry risks. For example, they could hurt a company if it pays too high a price, takes on too much debt to fund the deal, or does a poor job of weaving the acquisition into the existing company. Good execution is essential. So how has Church & Dwight done with its acquisitions? One helpful measure is return on equity , which tells you how much net income a company generates per dollar of invested capital. The more, the better. CHD Return on Equity data by YCharts. You can see the company’s performance in the above chart. Not only is 25% a solid return on equity, but the metric has improved over the years. If the acquisitions were hurting the business, this would probably be going lower instead.
Additionally, you can see how the company has generated increasing free cash flow , which helps pay for future acquisitions. All of this indicates that management is doing a great job using the company’s capital. Putting money in your pocket
Church & Dwight doesn’t use all of its money to acquire new assets — it also returns money to its shareholders. The company buys back its stock, which helps increase its earnings per share (EPS) ; in fact, EPS has grown faster than revenue over the past decade, averaging almost 13% annually. CHD Dividend data by YCharts. Church & Dwight is also an outstanding dividend stock. The company has increased its payout for 25 years in a row, making it a newly minted Dividend Aristocrat . The dividend yield won’t blow you away at just over 1%, but the payout ratio (the portion of earnings that goes to dividends) is only 33%, leaving the company plenty of room to increase that amount. Paying up for quality
If you think there’s a lot to like in Church & Dwight, well, the market agrees with you. The stock doesn’t typically come cheap — it’s averaged a price-to-earnings (P/E) ratio of 26 over the past decade and currently trades above that at a P/E of 29. Church & Dwight is a defensive stock that’s been popular with investors during the recent tech-stock sell-off. It’s fair to say that the stock could be a little too hot and might […]
Protected by Patchstack