Friday, March 18, 2011

Colgate-Palmolive (CL) Dividend Stock Analysis

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company is a dividend champion which has increased distributions for 48 years in a row. The most recent dividend increase was in February, when the Board of Directors approved a 9.40% increase to 58 cents/share. The major competitors of Colgate-Palmolive include Clorox (CLX), Procter & Gamble (PG), Church & Dwight (CHD) and Kimberly-Clark (KMB).

Over the past decade this dividend stock has delivered an annualized total return of 4.20% to its loyal shareholders.

The company has managed to deliver an impressive increase in EPS of 9.60% per year since 2001. Analysts expect Colgate-Palmolive to earn $5.06 per share in 2011 and $5.50 per share in 2012. This would be a nice increase from the $4.31/share the company earned in 2010. The company has managed to decrease the number of shares outstanding by 1.30% per year over the past decade through share buybacks, which has aided earnings growth.
Colgate generates over 60% of its sales from outside of the US. The growing emerging markets in Latin America and Asia and the rising middle class in these markets could present an excellent opportunity for the company. Latin America accounts for one third of sales, while Asia/Africa accounts for over one fifth of sales. The issue with overexposure to Latin America is that the continent has been prone to currency devaluations, which could impact profitability. Another issue could come from rising commodity costs, which could pressure margins and profitability despite expectations for rising volumes. Given the strong brand names of many of Colgate’s products however, the company could mitigate this by passing on cost increases to consumers as well as cost savings.

The company’s high return on equity has been on the decline since hitting a high of over 400% in the early 2000s. 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. This indicator is still impressive at 78.40%, but has been steadily decreasing, which means that new capital has been employed at progressively lower rates of return. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13% per year since 2001, which is higher than the growth in EPS.


A 13% growth in distributions translates into the dividend payment doubling every 6 years. If we look at historical data, going as far back as 1979, we see that Colgate-Palmolive has actually managed to double its dividend every eight years on average.
Over the past decade the dividend payout ratio has remained at or below 50% for a majority of the time. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Colgate-Palmolive is trading at 18.10 times earnings, yields 3.00% and has a sustainable dividend payout. The stock meets my entry criteria, and I will look forward to adding to my existing position in it.

Full Disclosure: Long CL, PG, CLX, KMB

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2 comments:

  1. Nice blog..I am looking forward to read your next great article.

    ReplyDelete
  2. Terrific analysis.

    I have owned CL since 2003 when the price hit the low 40s as a result of the initial writeoffs taken as part of the 2004 Restructuring Program, which has been managed beautifully.

    I have only one bone to pick, and that is your coverage of ROE. True enough, CL has experienced declining ROE, but this is due primarily to decisions on how to fund CapEx, not to changes in Returns on Capital Employed.

    After allowing Equity to hit about $300m in 2003, ROE spiked to well over 100% (the big spike on your chart) but Debt to Equity was about 10x, which leaves a company vunerable to rollover risk and potential liquidity problems. Management wisely decided to fund additional CapEx through retained earnings, increasing Equity and reducing Debt/Equity - this meant they had a smooth ride in 2008.

    Of course, decreasing leverage means that ROE will decline. In 2010, ROE did take a hit, because of the lower earnings resulting from the devaluation of the Venezuelan Bolivar, but this will hopefully not recur (though who knows, really, as Chavez is still in power).

    Still, it's not a big point. I will add your blog to my blogroll.

    ReplyDelete

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