Published February 12th, 2017 by Bob Ciura
To say that Colgate-Palmolive (CL) has stood the test of time, would be a huge understatement. The company has been in business for more than 200 years—it is nearly as old as the U.S. itself.
In turn, Colgate-Palmolive has one of the longest dividend histories of any publicly-held company. It has paid dividends to shareholders since 1895.
It has also raised its dividend for 54 years in a row. This makes it as a Dividend Aristocrat, a group of companies in the S&P 500 that have raised dividends for 25+ years.
Colgate-Palmolive’s 2016 dividend raise came on March 10. This means another dividend hike could come, in just a few weeks.
This article will discuss Colgate-Palmolive’s financial performance since the last dividend hike, and what investors should expect for the 2017 raise.
Colgate-Palmolive is a giant in the consumer staples sector. It operates in over 200 countries worldwide. Its annual sales exceed $15 billion.
The company is highly diversified geographically. Nearly 80% of the company’s annual sales come from outside North America.
It operates in the following segments:
- North America (21% of sales)
- Latin America (24% of sales)
- Europe (16% of sales)
- Asia-Pacific (18% of sales)
- Africa/Eurasia (6% of sales)
- Hill’s Pet Nutrition (15% of sales)
Colgate-Palmolive has a large product portfolio with many popular brands. Some of its core brands include Colgate, Palmolive, Softsoap, Irish Spring, Protex, Kolynos, Tom’s of Maine, Ajax, and the Hill’s line of animal nutrition products.
Colgate-Palmolive’s strong brand portfolio is its biggest competitive advantage. The company controls more worldwide toothpaste market share than its next three-largest competitors combined.
Source: 2016 Barclays Global Consumer Staples Conference, page 49
This provides Colgate-Palmolive with global scale, as well as pricing power. The ability to cut costs and raise prices has given the company a highly profitable business model.
In 2016, Colgate-Palmolive grew global volumes by 1.5%, excluding divestitures. Price increases boosted revenue by 2.5%.
This helped the company grow, despite the pressure of foreign exchange. Unfavorable currency exchange alone caused full-year revenue to decline 4.5%.
As a major multi-national company, Colgate-Palmolive has been hurt badly by the rising U.S. dollar. A high U.S. dollar relative to other major currencies, makes U.S. exports less competitive.
Because of currency, Colgate-Palmolive’s reported earnings-per-share were flat in 2016, versus 2015.
Thanks to cost cuts and price increases, Colgate-Palmolive grew adjusted diluted earnings-per-share by double-digits in 2016.
Continued expansion in the emerging markets will help fuel Colgate-Palmolive’s sales and earnings growth in the years ahead.
Colgate-Palmolive’s most compelling long-term growth catalyst is the emerging markets. While Colgate-Palmolive enjoys high market share in the U.S., its leadership position is even stronger in emerging markets like Brazil, Russia, India, and China.
Brazil, Russia, India, and China are the four countries known as the “BRIC” nations. These are among the premier emerging markets around the world.
Source: 2016 Barclays Global Consumer Staples Conference, page 51
Source: 2016 Barclays Global Consumer Staples Conference, page 52
Source: 2016 Barclays Global Consumer Staples Conference, page 54
Source: 2016 Barclays Global Consumer Staples Conference, page 53
The emerging markets like Brazil, Russia, India, and China have higher economic growth than more developed markets like the U.S., and large populations.
These regions led the way for Colgate-Palmolive in 2016. Organic sales in Latin America, Africa/Eurasia, and Asia-Pacific grew by 10%, 5.5%, and 2.0% in 2016, respectively.
Emerging-market organic sales increased 6.5% last year, a much better performance than the 1% comparable sales growth in developed markets.
To accelerate this growth going forward, Colgate-Palmolive is ramping up its investment in digital media. Colgate-Palmolive will allocate 20%-25% of its total media budget to digital advertising, up from just 2.5% in 2006.
In addition to growing sales through volume growth and price increases, Colgate-Palmolive is supporting sales growth with cost cuts.
Source: 2016 Barclays Global Consumer Staples Conference, page 7
Colgate-Palmolive realized significant gross margin expansion over the past several years, by leveraging its global scale.
The company’s efforts to raise prices and cut costs will allow it to continue increasing its dividend for the 55th year in 2017.
Colgate-Palmolive is a legendary dividend growth stock (and a Dividend King).
Source: 2016 Barclays Global Consumer Staples Conference, page 14
In recent years, dividend growth slowed down, along with Colgate-Palmolive’s revenue and earnings slowdown. Last year, Colgate-Palmolive raised its dividend by just 3%.
This is mostly due to currency, and the core operations of the company remain sound. That said, it does nevertheless limit Colgate-Palmolive’s ability to raise its dividend at a higher rate.
Fortunately, Colgate-Palmolive’s high profit margins should allow for another solid raise. The company generated adjusted earnings-per-share of $2.81 in 2016.
Meanwhile, its current annualized dividend is $1.56 per share, which equates to a 56% payout ratio. This is still a comfortable level and warrants another dividend increase.
Colgate-Palmolive stock has a 2.3% dividend yield, below that of many other large-cap consumer staples stocks. Maintaining a competitive yield is further justification for an increase in 2017.
Management will likely take another cautious approach to the annual dividend increase, as it did last year, given the persistence of the strong U.S. dollar.
For this reason, investors should not expect a 10%+ dividend increase this time around.
Still, a 4%-6% dividend increase would only raise the 2016 payout ratio to 58%-59%.
An increase of this nature would allow the company to reward shareholders with a dividend hike that exceeds inflation, while leaving enough cash flow left to invest in future growth initiatives.
Colgate-Palmolive has made important strides since our last review of the stock, and its underlying fundamentals improved over the course of 2016.
Volume growth and price increases resulted in strong organic sales and earnings growth.
But the company is still struggling with the strong U.S. dollar.
For this reason, while it is reasonable to expect a slight acceleration from last year’s dividend increase, investors should not expect a high dividend raise.
A reasonable expectation would be for a mid-single digit dividend raise for 2017.