Clorox prides itself on being one of the most trusted and recognized name brands for household cleaning products
COLLAPSE SUBDISCUSSIONAngela Gaddie
5:02pmJul 19 at 5:02pm
The Clorox Company (CLX)
Current stock price = $186.06
Total dividends paid over the past year = $5.60
Current Dividend Yield = Annual Dividends Per Share / Current Share Price
Current Dividend Yield = $4.43 / $186.06
Current dividend yield = 2.38%
Ke = Required rate of return (to be solved)
D1 = Dividend at the end of the first year, $1.11
P0 = Price of the stock today, $186.06
g = Constant growth rate 0.05, or 5%
Ke formula clorox.png
Ke (required rate of return) = 0.63%
P/E Ratio = 25.99
Clorox prides itself on being one of the most trusted and recognized name brands for household cleaning products (Clorox, 2019). The company was incorporated in 1913 and went public in 1928 on the San Francisco Stock Exchange (Company Histories, n.d.). In the early days of the company, its marketing was geared toward business to business activity in professional markets and the food/service industry. Clorox has expanded globally but the majority of its sales are still derived in the United States. Today, a German conglomerate maintains 28% ownership in the company (Company Histories, n.d.).
The price-earnings ratio is a way to valuate stock by applying a multiplier to current earnings. It takes into consideration earnings, sales growth of the company, and risk. Clorox’s required rate of return is 0.63% and its P/E ratio is 25.99. Its market share is equal to the earnings per share times the P/E ratio which turns out to be $42.10. According to Block et al. (2019), a low required rate of return means that the company has a positive financial outlook which is evident with Clorox. Risky investments compensate investors for the assumed risk, so it makes sense that the lower the rate of return, the less risky the investment. This is an inverse relationship with the P/E ratio as the lower risk investments tend to have a higher P/E ratio. The general relationship between a low Ke and a high P/E is supported by the data found on Clorox. If the dividend growth rate continued higher than five percent, then that would push the require rate of return up, insinuating that the stock is becoming riskier.
Kimberly-Clark Corp P/E Ratio = 20.85
Procter & Gamble P/E Ratio = 25.82
Two of Clorox’s competitors are Kimberly-Clark and Procter & Gamble of which have a P/E ratio of 20.85 and 25.85 respectively. Clorox’s P/E ratio at 25.99 is slightly in the lead amongst the three companies. This tells us that investors are willing to pay the most for Clorox’s shares due to the future growth expectations. It would indicate that the outlook for Clorox is better than both of its competitors. As the P/E ratio and Ke have an inverse relationship, we would expect that Clorox having the highest P/E would then have the lowest Ke. Similarly, Kimberly-Clark with the lowest P/E would have the highest rate of return.
A company’s growth rate, its required rate of return, and its value (aka stock price) are all related. They work together in dividend growth modeling which is a way to assess how attractive an investment is and if it is trading at a fair price or not. The stock price and current annual dividend are found in company reports and do not require assumptions, whereas the growth rate does rely on an assumption. The steadier the company over time, the more accurate a model like this would be. The required rate of return is the minimum amount of money that an investor would be willing to accept in exchange for purchasing a company’s stock. As the required rate of return increases, the stock price would decrease in value because of the relation to risk.
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). McGraw-Hill Higher Education.
Clorox. (2019, April 22). Clean Facts | Clorox®. Retrieved July 19, 2021, from https://www.clorox.com/our-purpose/clean-facts/#1
Company Histories. (n.d.). The Clorox Company — Company History. Retrieved July 19, 2021, from www.company-histories.com website: https://www.company-histories.com/The-Clorox-Company-Company-History.html
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