Dividend Aristocrats Part 41: Colgate Palmolive Company (CL) by Ben Reynolds, Sure Dividend

Colgate Palmolive (CL) is the global leader in toothpaste and manual toothbrushes. Colgate Palmolive was founded in 1806 and has increased its dividend payments every year for 52 years.

This makes Colgate Palmolive one of only 17 Dividend Kings – stocks with 50+ years of dividend increases.

Colgate Palmolive has long focused on international expansion. The company generates around two-thirds of its operating profit outside North America.

In addition to its long dividend streak and aggressive international expansion, the company also has an enviable track record of rising operating income that highlights the company’s long term success:

Colgate-Palmolive Company (CL)

Source: 2015 Consumer’s Staple Conference, slide 10

Business Overview

Colgate Palmolive operates in 2 business segments:

  • Oral, Personal, and Home Care
  • Pet Nutrition

The Pet Nutrition segment has generated 13% of operating profit for Colgate Palmolive through the first 9 months of the company’s fiscal 2015. The segment’s main brand is Hill’s.

The Oral, Personal, and Home Care segment has generated 87% of the company’s sales and operating profits through the first 9 months of fiscal 2015.  The segment sells well known consumer brand products including Colgate, Palmolive, SpeedStick, SoftSoap, Suavatel, Tom’s of Maine, and Ajax (among others).

Colgate Palmolive divides its Oral, Personal, and Home Care segment into 5 geographic divisions.  Each division’s percentage of the segment’s total operating profit through the first 9 months of fiscal 2015 is shown below to illustrate the global diversity of Colgate Palmolive:

  • Europe/South Pacific generated 20% of segment operating income
  • North America generated 24% of segment operating income
  • Latin America generated 32% of segment operating income
  • Africa/Eurasia generated 4% of segment operating income
  • Asia generated 20% of segment operating income

Interestingly, Colgate-Palmolive sells more non-pet consumer products in Latin America than in North America.

Colgate Palmolive’s Dividend History

As mentioned above, Colgate Palmolive has increased its dividend payments for 52 consecutive years.

The image below shows the stable growth in the company’s dividend payments:

Colgate-Palmolive Company (CL)

Over the last decade, Colgate Palmolive has increased its dividend payments by a compound rate of 10.1%. The company’s most recent dividend increase was for 5.6%. Colgate Palmolive will likely raise its dividend again for its April 2016 payment.

Colgate Palmolive stock currently offers investors a dividend yield of 2.4%, which is 0.3 percentage points above the S&P 500’s dividend yield of 2.1%. The company’s stock’s median dividend yield since 1977 is 2.4% as well.

Colgate Palmolive’s historical dividend yield is shown below.

Colgate-Palmolive Company (CL)

The stock has traded for a yield of between ~1% and ~3% since the mid 1990’s.

Competitive Advantage

Colgate Palmolive’s competitive advantage comes from its strong brands.  The company is the global leader in toothpaste.

Colgate-Palmolive Company (CL)

Source: 2015 Consumer’s Staple Conference, slide 83

And the global leader in manual toothbrushes.

Colgate-Palmolive Company (CL)

Source: 2015 Consumer’s Staple Conference, slide 83

And the global leader in fabric conditioner

Colgate-Palmolive Company (CL)

Source: Third Quarter, 2015 Presentation, slide 97

And is #2 globally in mouthwash

Colgate-Palmolive Company (CL)

Source: 2015 Consumer’s Staple Conference, slide 92

Finally, Colgate Palmolive is also #2 globally in bar soap.

Colgate-Palmolive Company (CL)

Source: Third Quarter, 2015 Presentation, slide 96

Colgate Palmolive has managed its brands well over the last 20 years.  The company has grown its brand strength through product innovation and strong advertising spending.

Colgate Palmolive has spent over $250 million per year on research and development in each of its last three fiscal years.

The company’s significant research and development spending has driven growth in both developed and developing markets as the company’s new products replace older products and attempt to gain share from competitors.

Colgate Palmolive supports its brands with large advertising spending as well.  The company spent $1.8 billion on advertising in full fiscal 2014; 10.3% of total revenue.  Colgate Palmolive buys significant brand recognition and consumer attention with its massive advertising budget.

Colgate Palmolive’s large size and global reach coupled with its research and development and massive advertising budget gives it lasting brand power.  The company’s brands and size give it a strong competitive advantage that new entrants to the market cannot match.

Colgate Palmolive’s Growth Prospects & Total Returns

Colgate Palmolive is experiencing short-term headwinds because of its global reach. The company is suffering from the strong United States dollar.

Colgate-Palmolive Company (CL)

Source: 2015 Consumer’s Staple Conference, slide 6

Despite these headwinds, Colgate Palmolive’s long-term growth prospects remain bright.

The company has compounded earnings-per-share at 7.1% a year over the last decade, with dividends growing 10.1% over the same time period.

Going forward, I expect Colgate Palmolive to deliver earnings-per-share growth of between 6% and 8% a year, in line with historical results. The company’s long-term growth driver is the rising middle class in emerging markets – especially India and China.

Colgate Palmolive Company (CL)

Source: Third Quarter, 2015 Presentation, slide 11

The company’s expected 6% to 8% earnings-per-share growth combined with Colgate’s current 2.4% dividend yield gives investors in Colgate Palmolive expected total returns of 8.4% to 10.4% a year going forward.

Recession Performance

Colgate Palmolive’s branded consumer products did exceptionally well during the Great Recession of 2007 to 2009.

The company managed to increase earnings-per-share each year throughout the Great Recession.

Colgate Palmolive’s success during economic weakness is attributed to its low-cost consumer goods coupled with strong brand name recognition.  People still need toothpaste and cleaning supplies; even during times of economic hardship.

Colgate Palmolive’s earnings-per-share through the Great Recession are below to show how well the company performed through that difficult time:

  • 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)

Valuation & Final Thoughts

Colgate Palmolive is offering investors total returns of 8.4% to 10.4% a year before accounting for valuation.

Colgate Palmolive is currently trading for a price-to-earnings ratio of 22.2. This is down from the company’s price-to-earnings ratio of ~27 a year ago. Still, Colgate Palmolive appears to be a bit overvalued at current prices.

There’s no doubt the company has a strong competitive advantage and a shareholder friendly management. High quality businesses with expected total returns in the 9% to 10% range include:

  • Altria (MO)
  • Coca-Cola (KO)
  • Wal-Mart (WMT)
  • General Mills (GIS)
  • McDonald’s (MCD)
  • Procter & Gamble (PG)
  • Johnson & Johnson (JNJ)

Generally, a business with a strong competitive advantage that is recession resistant should be purchased for no more than ~20 times earnings in today’s low interest rate environment. With the S&P 500 having a price-to-earnings ratio of 20 in recent years – and a long-term total return of ~9%, buying quality at a price-to-earnings ratio of 20 (or preferably, much less) means you are getting above average quality businesses for the same price of the average business in the S&P 500.

Colgate Palmolive is still a bit too pricey to justify initiating or adding to a position at current prices. Still, the company’s favorable long-term growth prospects and strong competitive advantage make the company a long-term hold based on The 8 Rules of Dividend Investing.