Friday, June 5, 2009

Colgate Palmolive (CL) Dividend Stock Analysis

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. It operates in two segments, Oral, Personal, and Home Care; and Pet Nutrition. The company is a Dividend Achiever and a Champion. Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895 and increased payments to common shareholders every year for 46 years.


From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 5.90% to its shareholders. While the stock has largely remained flat for the majority of the past decade (except for the breakout in the stock price in 2007) most of the returns came from reinvested dividends.

At the same time company has managed to deliver an impressive 10.70% average annual increase in its EPS since 1999.

The ROE has consistently remained high, ranging between 57% and 475% over the past decade.

Annual dividends have increased by an average of 11.40% annually since 1999, which is slightly higher than the growth in EPS.
An 11 % growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1977, Colgate Palmolive has actually managed to double its dividend payment every eight years on average. Just a few weeks ago Colgate Palmolive boosted its dividend by 10% for the 46th year in a row. The dividend is very well covered at the moment.

The dividend payout has ranged between a high of 51% in 2006 and a low of 33% in 2002. One positive fact is that the payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Despite the low dividend payout ratio and low P/E ratio, I require a dividend yield of at least 3% in order to initiate a position in Colgate Palmolive. Currently the yield is at 2.80%, and price earnings ratio is 17.

In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Clorox (CLX) trades at a P/E multiple 14 while yielding 3.60%.
I would consider initiating a position in Colgate Palmolive on dips below $58.66.

Full Disclosure: Long PG, KMB and CLX
Get an updated Trend analysis for CL, KMB, PG and CLX.
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3 comments:

  1. Dear Admin,

    I would like to republish this post and the post on MLPs at Self Directed Investor (http://www.selfdirectedinvestor.com/) and need your permission before doing so. I would also need a short bio and the author's name. Please email me at svnystrom@selfdirectedinvestor.com.

    Sincerely,

    Scott Nystrom, PhD
    Editor
    Self Directed Investor, Inc.

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  2. I really like this blog. One question I have though is how you factor in share repurchases when deciding between which business to own.

    According to Colgate's 2008 10-K, they paid out $825 million in dividends in 2008 AND repurchased $1.073 billion shares of stock. For each of the last 3 years, the total amount of share repurchases has exceeded the amount paid out in dividends.

    Here's the question: As a long-term investor, shouldn't I also care about the cash being returned to investors in the form of share repurchases which have the effect of increasing the portion of the company that I own?

    If CL pays a 2.8% dividend, and the share repurchases buy back 3% of the market cap of the company each year, isn't that a total "yield" of 5.8%? 2.8% in cash (taxable) and 3.0% increase (non-taxable) in the amount of ownership that my shares represent?

    Also, consistent share repurchases, like CL has done, mean less outstanding shares every year which makes it easier to raise the per share dividend -- even if they kept the total amount paid out as dividends the same, your dividends per share would go up simply because there are less shares outstanding.

    Bottom line, I like your dividend analysis approach, but I think you should also take into consideration a consistent history of share repurchases when deciding between one company and another.

    ReplyDelete
  3. Anon,

    That's a great question. I do not account for stock buybacks, and treat them like special dividends.
    Stock buybacks increase the "value" of outstanding shares, whereas dividends are something that you receive in the form of cash every quarter. As an individual investor who needs income to live off of, stock buybacks benefit me only when I decide to sell stock. Since I am a long term investor, selling a chunk of my portfolio would likely create large capital gains and large cap gains taxes as well. Thus I would appreciate it if companies spent more on dividends and less on buybacks. Furthermore, buybacks could be canceled at any moment. For example GE canceled its stock buyback program 5-6 months before cutting its dividends. Thus buybacks are inferior to dividends.
    In addition to that buybacks are the same as companies reinvesting most of their profits back in the business, except that nothing productive is being done with the cash. Last but not least buybacks could be initiated during good times for the business, when stocks are trading at multi-year highs, which could lead to the company buying overpriced shares, which doesn't really benefit me. As a shareholder, I would like to have the option to re-invest or not in a particular company.

    And that's why i treat buybacks as special dividends. They are great to have,but don't count too much on them.

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