Friday, February 21, 2014

Colgate-Palmolive (CL) Dividend Stock Analysis

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. The company operates in two segments: Oral, Personal and Home Care; and Pet Nutrition. This dividend king has paid dividends since 1895 and has increased them for 50 years in a row.

The company’s latest dividend increase was announced in March 2013 when the Board of Directors approved a 9.70% increase in the quarterly annual dividend to 34 cents /share. The company’s peer group includes Procter & Gamble (PG), Clorox (CLX), and Kimberly Clark (KMB).

Over the past decade this dividend growth stock has delivered an annualized total return of 12.60% to its shareholders.


The company has managed to deliver a 9% average increase in annual EPS over the past decade. Colgate-Palmolive is expected to earn $2.83 per share in 2013 and $3.09 per share in 2014. In comparison, the company earned $2.58/share in 2012.

In addition, between 2004 and 2013, the number of shares decreased from 1135 million to 937 million.
Colgate generates over 80% 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 Colgate Palmolive. 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.

The toothpaste market is characterized by high penetration by branded products, as few people are going to save a few cents and put an unknown paste for their teeth. In addition there is brand loyalty, which results in recurring revenue streams from millions of customers worldwide. The company also has wide global reach, and large scale of operations. The strong brands, customer loyalty and global scale of operations are indicative of a wide moat by this company.

In 2012, Colgate-Palmolive initiated a four year Global Growth and Efficiency Program, in an effort to simplify and standardize work processes, reduce structural costs, and increase sales globally. The company is expected to spend anywhere between $1.1 to $1.25 billion through 2016, with annual benefits expected in the $365-$435 million annually. These benefits will be reinvested in items such as new products and in brand building. As a result of the program, 6% of global workforce will be laid off by 2016.

In general, earnings per share will increase through emerging market sales growth, share buybacks, cost restructurings. I can foresee sales to grow by 5 – 6 %year, which could easily translate into earnings per share growth of 9- 10% for the foreseeable future.

The annual dividend payment has increased by 11.40% per year over the past decade, which is higher than the growth in EPS. This was accomplished through the expansion of the dividend payout ratio. Future growth will be limited by any growth in earnings per share.

An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. Since 1985, Colgate-Palmolive has been able to double dividends every seven years on average.

The dividend payout ratio increased from 37% in 2003 to almost 47% in 2012. 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 enjoys really high returns on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is overvalued, as it trades at a P/E of 22.60 and yields only 2.10%. I am analyzing the company because I believe it is quality dividend growth stock, which will be a very good addition to my portfolio on dips below $55-$56.

Full Disclosure: Long CLX, PG, KMB, CL

Relevant Articles:

How to read my stock analysis report
The Dividend Kings List for 2014
Why Dividend Growth Stocks Rock?
Price is what you pay, value is what you get
Why do I keep talking about the same companies all the time
Five Dividend Paying Companies Boosting Shareholders' Distributions

4 comments:

  1. I just do not understand why you would add it "if it dips" because it may never dip and because I assume, based on past performance, that you would never need to sell it.
    I bought it over 20 hers ago and reinvested my dividends along the way and now I have a nice bundle. I do not plan to sell it ever and it will be in my estate when I die.

    ReplyDelete
  2. Hi ET,

    The stock is overvalued today, so my money is better invested elsewhere, because I would get more bang for my buck. I do not like to overpay for future growth, and I always have alternatives. Hence, I am only willing to buy on dip.If CL is always overvalued for the next 30 years, I would put my money elsewhere.

    I found CL to be attractively priced between 2008 and 2012, which is when i bought it, and built my position. I do not plan on selling it, unless of course they decide to cut dividends, the company gets acquired in cash or it gets terribly overvalued at say 40 times earnings.

    DGI

    ReplyDelete
  3. How can it be that their ROE is around 100% + they are paying out around 37-47% in dividends? To me if those two values added together is above 100% the company must be using debt as a huge leverage to push up ROE.

    Is one of the bonus incentives for the management based on ROE? How has their debt increased from 2004 to now?

    And if I am wrong with my thoughts then please tell me so and explain how I am thinking wrong here. With this said I do not mean that it is a bad investment because I am sure that they will continue to sell massive amount of products for a long time to go!

    ReplyDelete
  4. Hi Fredrik,

    The company earned over 2.3 billion in free cash flow in 2013, but had long-tern debt of 5.6 billion. I don't see debt as an issue because it could be easily repaid in 2 years.

    Actually debt is also not bad for CL, because it is taking debt today but the money it will use to repay it in 10-20-30 years will have lower purchasing power. Since CL will be able at very minimum to at least pass inflation increases to customers, it will be able to easily earn even more to cover that debt.

    The company also paid almost 1.4 billion in dividends, so distribution is sustainable.

    Also, when a company repurchases shares, that reduces owners equity from an accounting standpoint. However, the intrinsic value stays the same for the business as a whole, but it is increased for each share remaining.

    Best Regards,

    DGI

    ReplyDelete

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