Clorox: A Counter-Trend Play

Cramer on Friday finished his weeklong series on dividends with a focus on Clorox. Like the other companies he highlighted – Air Products , Procter & Gamble , Chevron and Johnson & Johnson – Clorox is in position to raise its payout, which is an incredibly bullish sign in a market where earnings estimates can no longer be trusted.

Wall Street expects an 8.6% increase to $2.01 a share in May. That would bump up Clorox’s yield to 3.8% at the present share price. If it happens, investors could bank on it because fiscal-year earnings should come in at just more than double the dividend. Cramer wouldn’t recommend the stock if that weren’t the case.

As for Clorox’s business, private-label encroachment on the company’s brand names is starting to recede. Cost-cutting consumers had traded down to save money, which put Kingsford, Glad, Hidden Valley and other Clorox products at a disadvantage. But the pressure seems to be easing a bit, which is good news.

Declining raw costs also play their part here. Clorox was forced to raise prices when commodity prices surged, but those prices have fallen since. Don’t expect the company to roll those increases back, except for Glad trash bags, management said. Instead Clorox will hold steady and pocket the difference, boosting margins and in the end earnings.

The stock is trading at just 13 times calendar 2009 earnings, a big discount the five-year average of 19.6. A move back to that median should propel CLX 49% to $77.

There’s also another reason Cramer’s bullish on Clorox: Right now this is counter-trend play. The rally sent big money managers running toward sexier stocks than this consumer-staples company. So shareholders are getting CLX, with its good long-term prospects and great new management, on the cheap. This strategy, he said, earned him big returns at his hedge fund.

Bottom line, though, Clorox can raise its dividend at a time when few others can. That’s the kind of stock, Cramer said, that investors want right now.

Cramer's charitable trust owns Chevron and Johnson & Johnson.

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