Friday, February 26, 2010

Colgate-Palmolive (CL) Dividend Stock Analysis

Colgate-Palmolive Company (CL), 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 recently increased its quarterly dividend by 20.40% to 53 cents/share. This is the forty-seventh consecutive dividend increase for Colgate-Palmolive, which is a dividend champion.


Over the past decade this dividend stock has returned 4.30% per annum.

Earnings per share have increased by 11.10% on average since 2000. Since 2000 the number of shares outstanding has decreased from 625 million to 525 million, or an average decrease of 1.90% annually. Analysts estimate that EPS would grow by 9.80% to $4.80 in FY 2010. FY 2011 EPS are expected to increase by 11.40% from there to $5.35.

Sales outside North America accounted for two-thirds of the company’srevenues. The company’s strong competitive advantages in the oral healthcare field plus the low capital requirements have enabled it to generate high returns on capital.

Returns on Equity have been truly phenomenal, having never fallen below 80% since 2000.

Annual dividends have increased by 11.80% on average over the past decade, which is slightly higher than the growth in earnings.

A 12 % growth in dividends translates into the dividend payment doubling every six years on average. If we look at historical data, going as far back as 1976, Colgate Palmolive has actually managed to double its dividend payment every eight and a half years on average.

The dividend payout ratio has consistently remained below 50%, with the exception of a brief spike to 50.80% in 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The company trades at a P/E of 18.80 times earnings and has an adequately covered dividend payment. The current yield of 2.60% is below my 3% entry threshold. If we look at the yield from the past decade however, CL has yielded more than 3% only during the lows in early 2009. Because of this I initiated a position in Colgate recently. I would look forward to add to this position on dips below $71, which would be my ideal entry price.

Full Disclosure: Long CL
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2 comments:

  1. I very much enjoy your site, and have often referred to it. One thing I would change, in fact the most important thing, is the following:

    In all of your analyses, you do yourself and your readers a great disservice by focusing only on the headline ROE number. If you break out ROE, the equation is as follows:

    ROE = (one year's earnings / one year's sales) x (one year's sales / assets) x (assets / shareholder equity)

    That last item is one way of representing leverage, and it means a company can juice its ROE using leverage. For example, a company can take on more leverage in an otherwise down year to maintain a steady ROE.

    In the case of CL, yes it's a great company, but it has a debt to equity ratio of 1.3. That is as compared to PG's debt to equity ratio of 0.3. CL's debt to equity ratio, its leverage, is over four times as high!!! Is it any wonder that CL's ROE is much higher than PGs? No. Does this make CL a better company than PG. No. By focusing on headline ROE one misses that.

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  2. I own both PG and CL, and like the above, always tried to determine which is the best one. All I can say is that financials ratios aside, PG has a market cap that is almost 8 times that of CL and no matter how you look at it, it is much more difficult to grow that base. At a market cap of 30B, CL has probably more possibilities for growth and I think the aforementioned debt level is easily manageable for a company with such predictable earning power.

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