Published November 22nd, 2016 by Bob Ciura
Colgate-Palmolive was founded all the way back in 1806. Let that sink in for a moment: Colgate-Palmolive has been in business for more than 200 years…
The company was founded by William Colgate, who started a starch, soap, and candle business in New York City.
Today, Colgate is a global giant. It sells its products in over 200 countries and territories around the world, and the company generates $16 billion in annual sales.
It has paid uninterrupted dividends since 1895, and has increased its dividend payments for the past 54 consecutive years.
It is a Dividend Aristocrat, a select group of companies in the S&P 500 that have raised dividends for at least 25 consecutive years. You can see the entire list of Dividend Aristocrats here.
Keep reading this article to learn about the investment prospects of consumer staples sector Dividend Aristocrat Colgate-Palmolive.
Colgate-Palmolive operates in the consumer staples sector. The company is organized into four reporting segments:
- Oral Care (47% of sales)
- Personal Care (20% of sales)
- Home Care (19% of sales)
- Pet Nutrition (14% of sales)
The Oral Care business is home to the company’s toothpaste and other related products, which are sold under the Colgate brand.
The Personal Care business is made up mostly of soap and other personal hygiene products, sold under the Palmolive, Softsoap, Irish Spring, and Protex brands.
Home Care is where Colgate-Palmolive manufactures its home cleaning products, like Ajax.
Lastly, Pet Nutrition is the company’s brands of pet food. The main brand in this segment is Hill’s Science Diet.
Colgate-Palmolive’s business continues to grow, particularly in the international markets and certain product categories.
Last year, organic revenue—which excludes the impact of foreign exchange fluctuations—rose 5% across the company. Growth was led by Latin America and Africa/Eurasia, which posted organic growth rates of 9.5% and 6%, respectively.
In addition, Colgate-Palmolive grew organic revenue by 6% in Pet Nutrition.
To generate this growth, Colgate-Palmolive is investing heavily in new media platforms to engage with consumers. One compelling focus area is digital. For example, in 2006 just 2.5% of Colgate-Palmolive’s media budget was allocated to digital media.
By next year, the company will allocate 25% of its media spending to digital.
E-commerce is a major strategic area for business development. Colgate-Palmolive has partnered with e-commerce giant Alibaba (BABA) in China, and the results are very strong thus far.
Source: 2016 Barclays Global Consumer Staples Conference, page 75
Continued expansion into international markets and in new channels is the foundation of Colgate-Palmolive’s future growth potential.
Colgate-Palmolive has a well-rounded plan to produce future growth. One part of its plan is through product innovation. The company spends aggressively on R&D to come up with new, market-leading products.
R&D spending over the past few years is as follows:
- $274 million in 2015
- $277 million in 2014
- $267 million in 2013
Expansion in new markets is a key part of Colgate-Palmolive’s growth strategy. The company derived 80% of its net sales last year from outside North America.
Source: 2015 Annual Report, page 2
Specifically, the emerging markets are a focal point for the company. Colgate-Palmolive’s annual revenue is evenly split among developed and emerging markets.
For example, the company generates approximately 27% of its sales from Latin America, and another 15% from Asia. These are high-growth markets with rapidly expanding middle classes. As such, they are fertile territory for a consumer staples giant like Colgate-Palmolive.
Take China for example—a country with a population of 1 billion and a rising middle class. Colgate-Palmolive’s toothpaste market share in China has nearly tripled since 1995.
Source: 2016 Barclays Global Consumer Staples Conference, page 53
Another major component of the company’s growth strategy is margin expansion. A focus on efficiency and cost-cutting has propelled significant margin expansion over the past several years.
Source: 2016 Barclays Global Consumer Staples Conference, page 7
Competitive Advantages & Recession Performance
Colgate-Palmolive’s most important competitive advantage is its brand recognition. The company has a dominant position in its core product categories, most notably in toothpaste.
Source: 2016 Barclays Global Consumer Staples Conference, page 49
In toothpaste, Colgate-Palmolive’s market share is more than three times as large as its closest competitor.
Such high market share allows Colgate-Palmolive to charge higher prices for its premium products. And, Colgate-Palmolive can raise prices over time. Pricing power is a critical competitive advantage for consumer staples companies.
Another major advantage for Colgate-Palmolive is that the company sells products which are necessities of modern life. Consumers cannot do without soap and toothpaste. In turn, Colgate-Palmolive remains highly profitable, even during recessions.
Colgate-Palmolive’s earnings-per-share through the Great Recession are shown below:
- 2007 Earnings-per-share of $1.69
- 2008 Earnings-per-share of $1.83 (8.3% increase)
- 2009 Earnings-per-share of $2.19 (19.7% increase)
The fact that Colgate-Palmolive increased earnings-per-share each year throughout the last recession is a credit to its strong business model.
Valuation & Expected Total Return
Colgate-Palmolive is a high-quality company, but investors have to pay a high price for the luxury of owning the stock. The stock trades for a price-to-earnings ratio of 26. This is slightly above average. The S&P 500 trades for an average price-to-earnings ratio of 25.
Moreover, since 2000 Colgate-Palmolive stock has held an average price-to-earnings ratio of 20. Therefore, the stock could be considered slightly overvalued, or at least fairly valued.
Without expansion of the price-to-earnings ratio to propel the share price higher, future expected returns will be comprised of earnings-per-share growth and dividends.
A breakdown of Colgate-Palmolive’s potential returns going forward is as follows:
- 4%-6% organic revenue growth
- ~50 basis point growth from margin expansion
- 1% earnings-per-share growth from share repurchases
- ~2.5% current dividend yield
Under this scenario, Colgate-Palmolive stock would generate 8%-10% total returns moving forward.
Colgate-Palmolive stock may seem slightly overvalued at the moment. Value investors may wish to wait for a better buying opportunity.
That being said, buy-and-hold dividend growth investors should focus instead on the long-term. Colgate-Palmolive has a highly profitable, recession-resistant business model. The company is one of only 18 Dividend Kings thanks to its 54 consecutive years of dividend growth.
Growth potential for Colgate-Palmolive remains compelling, thanks to high-growth international markets and e-commerce.
As a result, Colgate-Palmolive stock is often a core holding for dividend growth investors.