Published by Bob Ciura on November 8th, 2017
The Dividend Aristocrats are a group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
We review all 51 Dividend Aristocrats each year. The next stock to be analyzed is Colgate-Palmolive (CL).
Colgate-Palmolive has a long history of rewarding shareholders with dividends.
Not only is Colgate-Palmolive a Dividend Aristocrat. It is also a Dividend King, an even smaller group of companies with 50+ consecutive years of dividend increases.
There are just 23 Dividend Kings, including Colgate-Palmolive. You can see all 23 Dividend Kings here.
It has paid uninterrupted dividends since 1895, and has increased its dividend payments for the past 55 consecutive years.
Colgate-Palmolive traces its roots all the way back to 1806. The company has been in business for more than 200 years.
It was founded by William Colgate, who started a starch, soap, and candle business in New York City.
Today, the company manufactures oral care products like toothpaste, personal care products such as soap, home cleaning products, and pet food.
Source: Investor Presentation, page 8
Major brands include Colgate, Palmolive, Hill’s Science Diet, and many more.
Colgate-Palmolive is a global giant. It sells its products in over 200 countries and territories around the world, and the company generates $15 billion in annual sales.
The company has a highly diversified business model, in terms of products as well as geographic markets. Approximately 51% of the company’s revenue comes from emerging markets.
Source: Investor Presentation, page 7
This has paid off, as emerging markets will be a critical growth catalyst for the company moving forward. Colgate-Palmolive has the #1 position in China, with market share above 30%.
However, the company also faces operating challenges, which have kept a lid on its growth potential.
Colgate-Palmolive enjoys a strong brand portfolio and high profit margins. This has led to operating profit growth of 6.5% compound annually, from 1994-2016.
Source: Investor Presentation, page 27
Conditions have tightened as of late. Colgate-Palmolive has struggled to generate growth in recent years.
For example, Colgate-Palmolive’s net sales declined 5% in 2016, to $15.2 billion. The company benefited from 2.5% pricing increases, but this was more than offset by a 3% decline in unit volumes.
Declining volumes are a concern that demand for Colgate-Palmolive’s products is falling. Thanks to cost cuts, Colgate-Palmolive’s adjusted earnings-per-share were flat in 2016, compared with 2015.
Performance has been mixed to start 2017.
Net sales increased 0.7% through the first nine months, thanks to 3% organic revenue growth in the emerging markets. This helped offset a 1.5% sales decline in the developed markets.
Higher operating expenses caused earnings-per-share to decline 6.4%. Specifically, worldwide advertising expense jumped 19% last quarter, as the company has ramped up marketing spending to boost sales.
This trend could continue for the foreseeable future. Colgate-Palmolive management expects revenue to rise at a low-single digit pace in 2017. Meanwhile, earnings-per-share are expected to decline in the mid-single digits for the year.
Competitive Advantages & Recession Performance
Colgate-Palmolive has many competitive advantages which have fueled its growth over the past 200 years.
First, it has built a dominant position in its core product categories, most notably in toothpaste.
In toothpaste, Colgate-Palmolive’s market share has risen steadily for many years. Today, it commands a higher market share than the next-three biggest competitors combined.
Source: June 2017 Investor Presentation, page 11
Such high market share allows Colgate-Palmolive to charge higher prices for its premium products, and raise prices over time. Pricing power is a critical competitive advantage for consumer goods stocks.
Another major advantage for Colgate-Palmolive is that the company sells products which are necessities of modern life. Consumers need oral, personal, and pet care products.
Colgate-Palmolive enjoys steady demand, which gives the company consistent profitability, 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 (20% increase)
- 2010 earnings-per-share of $2.16 (1.4% decline)
Colgate-Palmolive generated positive earnings growth in 2008 and 2009, during the worst years of the recession. Earnings dipped slightly in 2010, but resumed growing in 2011 and thereafter.
The company’s strong performance from 2007-2010 is a credit to its strong business model and powerful brands.
Valuation & Expected Returns
Colgate-Palmolive stock has a current price-to-earnings ratio of 27.4. This is above its 10-year average price-to-earnings ratio, which is 23.5 according to ValueLine.
Source: Value Line
And, Colgate-Palmolive is even more richly valued than the S&P 500 Index, which has an average price-to-earnings ratio of 25.8.
Given Colgate-Palmolive’s struggles to generate earnings growth in recent years, it does not seem to justify a premium valuation multiple.
As a result, there is a risk of multiple contraction. This would negatively impact returns. For example, if Colgate-Palmolive traded at its 10-year average price-to-earnings ratio, it would result in a share price decline of approximately 17%.
In addition to changes in the valuation multiple, returns will be generated by earnings growth and dividends. A potential breakdown of future returns is as follows:
- 3%-4% revenue growth
- 1%-2% share repurchases
- 2% dividend yield
Through a combination of revenue growth, share repurchases, and dividends, total returns could reach 6%-8% annualized.
As a dividend stock, Colgate-Palmolive. It has a dividend yield of approximately 2.2%, which is only slightly above the S&P 500 Index average yield.
And, its declining earnings have reduced its dividend growth. Colgate-Palmolive’s dividend growth rate has declined steadily in recent years.
For example, the company has raised its dividend by just 2.6% in each of the past two years. This dividend growth rate barely beats inflation.
Colgate-Palmolive is a high-quality business, with several category-leading brands. The company has growth potential, through product innovation and in the emerging markets.
Now might not be the best time to buy shares of Colgate-Palmolive, as the stock appears to be overvalued. The company needs to prove it can generate higher levels of growth, to justify its premium valuation.
Colgate-Palmolive does not offer a high yield, or high dividend growth. That said, investors can still count on steady dividend increases each year.