I’d buy Church & Dwight

I don’t own shares in Church & Dwight (NYSE:CHD), but I’m thinking about buying some. In my view, it’s a great business trading at a decent price.

Church & Dwight is a US-listed company that makes household and personal products. Its most famous brand is probably Arm & Hammer, the baking soda toothpaste.

The main issue with the shares is growth. Toothpaste sales are (as far as I can tell) unlikely to increase significantly any time soon.

In my view, however, the overall quality of the company and the valuation at which its shares trade make up for the uninspiring growth prospects.

Church & Dwight produces returns on its fixed assets that I think are outstanding. The business has just under $653m in fixed assets and generates a little over $1bn in operating income.

That’s a return of 161%, stronger than its competitors Procter & Gamble (122%) and Colgate-Palmolive (101%), both of which are also Dividend Aristocrats.

The stock has fallen by just under 20% since the beginning of the year. I think it now trades at an attractive valuation.

With a market cap of just under $20bn, $2.5bn in debt and $240m in cash, Church & Dwight generates a free cash flow yield of 4.21%. In my view, that’s an attractive return for a Dividend Aristocrat of this quality.

I’ll avoid Diageo

I don’t think there’s much wrong with Diageo (LSE:DGE). But I don’t anticipate buying shares for my portfolio.

It’s a premium spirits manufacturer, with some beer and wine exposure. Its best-known brands include Baileys, Guinness, Smirnoff, and Johnnie Walker.

The company’s brand profile is impressive, but its returns on fixed assets are good without being great. Diageo has around £4.8bn in fixed assets and generates around £4.2bn in operating income.

That’s a return of around 87%. I think that’s more than respectable, but it’s lower than Diageo’s beverage competitors Brown-Forman (138%) and Coca-Cola (162%).

The shares have fallen by around 14% since the beginning of the year. But they haven’t fallen enough to make me want to add them to my portfolio.

With a market cap of just under £81bn, Diageo has around £15bn in debt and £2.7bn in cash. It generates £2.8bn in free cash, which amounts to a yield of around 3%.

For me, that’s not quite enough of a return for a Dividend Aristocrat with Diageo’s return on fixed assets. I’d be willing to buy the shares at a lower price, but not at these levels.

Conclusion: buying Dividend Aristocrats

Church & Dwight is forecast to grow earnings at 7% annually. If the company achieves this, it should generate an average yearly return of 5.82% over the next decade.

Diageo’s earnings are forecast to grow by 12% annually. At today’s prices, achieving this would result in an average return of 5.36% a year over the next 10 years.

For me, the conclusion is clear. Church & Dwight has better returns on fixed assets, trades at a cheaper price, and looks set to provide a better return over the next decade. As such, I’d buy and continue to monitoA Diageo for the time being.

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