Church & Dwight On Fire

By Matt Cavallaro | December 22, 2011 AAA

It's not the sexiest name, but Church & Dwight (NYSE:CHD) is one of the best gifts investors have gotten during the persistently volatile season. Is it too late to clean up with Church & Dwight?

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Rock Solid Performance
Up about 30% year-to-date, Church & Dwight's consistently strong operating performance is enviable. EPS growth has been consistently over 10% for the past three years, according to Church & Dwight's CEO James Craigie. Operating margins have been rising for a number of years as well. The New Jersey-based manufacturer of popular household items, such as Arm & Hammer, Pepsodent and Trojan Condoms, reported net income of $79.6 million during the third quarter. Net sales grew to $701 million. Of note, Arm & Hammer and XTRA sales rose 10% year-over-year in dollar terms. Management anticipates sturdy organic sales growth in the Q4, and synergies may come online soon due to new plant openings.

Years of dependable operating performance have resulted in an excellent balance sheet featuring great cash flow - enough to retire all of Church & Dwight's debt, in fact. Expect a boost in the dividend yield, and augmentation of the $300 million buyback that is in place, using some of that cash flow. Church & Dwight already doubled its dividend in February 2011, and another hike might be just around the corner as the company targets a 2% yield. On a relative basis, Church & Dwight's yield isn't competitive compared against Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) or Clorox (NYSE:CLX). What Church & Dwight lacks in yield (1.5%), it more than makes up for with stable capital appreciation potential. (To learn more about yields, read Investment Valuation Ratios: Dividend Yield.)

Best of a Good Group?
On top of the stellar yearly gain, Church & Dwight's long-term price chart looks like a staircase. The trend should continue. Highly volatile markets are increasingly pushing investors to a defensive sector rotation strategy. The Consumer Staples Select Sector SPDR (ARCA:XLP) is the top-performing group over the past month. Furthermore, the sector trails only utilities for the year. If Europe continues to rattle markets, Staples' low-risk premium will keep drawing interest.

Church & Dwight's operating performance separates it from the pack. The sluggish pace of economic growth and rise in raw material prices seem to be impacting the competition to a slightly greater extent. Procter & Gamble's net income slipped 2% last quarter as price increases led to lower volumes and lost market share. Kleenex and Huggies diapers seller Kimberly Clark (NYSE:KMB) recently downgraded its sales growth target as consumers trade down. Colgate-Palmolive indicated that 2011 gross margins will be squeezed more than previously expected, although sales did climb 11% last quarter. Despite economic headwinds, these companies still boast outstanding brands and attractive yields that investors want.

The Bottom Line
Church & Dwight simply appears to be the best of the group right now. Of course, there are risks to be aware of. Stagnating global growth and higher input costs - oil in particular - pose serious threats. On the other hand, if the risk on trade re-emerges, the staples sector would be left in the dust.

Yet it seems like broad market volatility is one thing investors can count on for the foreseeable future. Church & Dwight can capture alpha from its position of stability. Currently trading around $45, Church & Dwight's stock is in a consolidation pattern at the top of a longer uptrend. If the stock breaks away from the current channel and surmounts the $45 resistance level, the next test will be the 52-week high of $46.29. (For related reading, see Analyzing Chart Patterns.)

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At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.

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