Consumer products company Clorox (NYSE:CLX) announced on September 21, 2010 that it was selling its auto-care brands (STP and Armor All) to Avista Capital Partners for $780 million. Clorox management said it would use the funds to buy back stock. Trading at its five-year high, you have to wonder if this is the best use of shareholder funds.
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Clorox stock hit an all-time high of $69.36 on May 2, 2007. Since then, Clorox's total return is 6.4%, all of it from dividends. Shareholders can take solace knowing the S&P 500 was down 23.8% in the same three-year period. In 27 years, its stocks traded no higher than where it sits today, and yet management wants to buy back shares. You would think its desire to be more of a health and wellness company would translate into acquisitions rather than share repurchases. However, given its lofty stock price, debt repayment seems like a smarter move.
When you look at Clorox's valuation metrics today compared to its five-year average, you'll see that it's trading at multiples lower than in the past. For instance, its price-to-earnings ratio is currently 15.7, 14% lower than the five-year average of 18.3. Using the average, Clorox's stock theoretically could trade for $78 a share. Assuming it uses the full $780 million to buy back shares, it will reduce share count by an estimated 10.78 million, leaving it with 128.15 million shares outstanding. As we sit here today, this would amount to an 8.5% increase in earnings per share. When you consider that some studies have shown that raising prices by 1% leads to a 12.5% increase in earnings, it hardly seems like a worthwhile investment.
|Church & Dwight (NYSE:CHD)||16.6||1.8|
|Avon Products (NYSE:AVP)||21.5||1.3|
|Alberto Culver (NYSE:ACV)||21.5||2.0|
Share Repurchase History
In the past five years, Clorox repurchased $1.3 billion of its stock, most bought in fiscal 2008 paying $61.65 for 14.08 million shares. The average price of its stock between June, 2007 and June, 2008 was $59.11, meaning it overpaid by at least $2.54 a share. In the biggest share repurchase in its history, it did much better, paying the equivalent of $46.25 a share, in an asset and share exchange with Germany's Henkel AG. The average price of its stock when the deal was completed in November, 2004 was $55. If only it could buy back its stock in big chunks all the time, shareholders would get better value. Unfortunately, deals like the Henkel one rarely come along. In the end, it was more a divestiture than an accelerated share repurchase. History tells me Clorox has a mediocre buyback record.
In late 2007, Clorox bought Burt's Bees for $913 million. The acquisition dramatically altered its future and made possible the sale of its auto care brands mentioned earlier. RBC Capital Markets analyst Jason Gere believes it should look for opportunities in Asia and South America that will diversify its geographic mix beyond North America. The $780 million would come in handy when making a personal-products acquisition outside the U.S. It could use debt, but it already has more than $2 billion owing. In a time of restraint, why not use plain old cash to close the deal.
The Bottom Line
Warren Buffett believes you buy back stock when it's incredibly cheap. Clorox might not be expensive, compared with similar companies, but it's no bargain either. For the sake of shareholders, management needs to reconsider its use of this cash. (For related reading, take a look at How Buybacks Warp The Price-To-Book Ratio.)
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