Colgate-Palmolive - Strong Market Positions Justifies Premium Valuation

| About: Colgate-Palmolive Co. (CL)

Shares of Colgate-Palmolive (NYSE:CL) have been off to a good start in 2013. The consumer products conglomerate focused on toothpaste, toothbrushes and other personal care products reported a decent set of fourth-quarter results, followed by some shareholder-friendly initiatives, including a dividend hike and a stock split.

Shareholders applauded the moves and sent shares some 9% higher so far in 2013.

Analyst Group Presentation

In its analyst presentation in the final week of February, Colgate states (pdf) that it is well positioned for the year of 2013. The company remains focused on its core operations, while being pro-active on new growth opportunities, and continues to find new ways to increase efficiency.

At the moment, Colgate generates approximately half of its revenues from North America and Europe, with the remainder of revenues being generated in emerging markets. The company, which owns strong brands including Colgate, Ajax, Palmolive and the acquired Sanex, has reported a decent 3.5% volume growth in 2012 (excluding divestitures) as organic growth came in at 6.0%

The company has demonstrated consecutive growth in revenues and profitability. This disciplined growth approach has resulted in a strong long-term share price performance, driven by 50 years of consecutive dividend increases.

Shareholder Friendly Initiatives

Last week, at the start of March, Colgate announced some shareholder friendly initiatives. The company's board approved a two-for-one stock split. Typically shareholders applaud such measures as shares look optically cheap based on the post-split price. Note that nothing structurally changes as a result of a stock split, which is merely a cosmetic operation.

The company furthermore announced a 10% dividend hike in its quarterly divided from $0.62 towards $0.68 per share. The new annual dividend rate of $2.72 per share will be $1.36 per share following the split.

CEO and Chairman Ian Cook commented on the Board's moves, "Colgate finished 2012 with excellent growth momentum worldwide, driven by broad new product success. Today's actions demonstrate our confidence in the continued strong and profitable growth of Colgate's global business."


Colgate-Palmolive ended its fiscal year of 2012 with $884 million in cash and equivalents. The company operates with $5.2 billion in short and long term debt, for a net debt position of $4.3 billion.

The company generated full-year revenues of $17.1 billion. The company net earned $2.47 billion for the year, or $5.15 per diluted share.

The market currently values Colgate-Palmolive around $53.2 billion. This values the company at around 3.1 times 2012's annual revenues and 21-22 times annual earnings.

The $1.36 annual dividend based on the post-split stock price provides investors with an annual dividend yield of 2.4%.

Some Historical Perspective

Long-term holders of Colgate's stock have had quite some pleasure from their investment. Over the past decade, shares have more than doubled as shares steadily rose from levels around $50 in 2005 to fresh all time highs around $116. Shares are trading within sight of these highs, currently exchanging hands around $114.

Between 2009 and 2012, Colgate has steadily expanded its annual revenues by roughly 12% from $15.3 billion in 2009 to $17.1 billion over the past year. Earnings rose from $2.3 billion to $2.5 billion over the same time period, while earnings per share rose faster as the company repurchased roughly 5% of its shareholder base over the period.

Investment Thesis

Long-term holders of Colgate have seen decent and stable returns as the global tooth care company has steadily grown its volumes across the globe, and built up dominant market positions. In 2012, the company expanded its market share in toothpaste by 50 basis points to an incredible 44.6%, percentages almost hinting towards a monopoly. The market share for its toot brush business grew 80 basis points to 32.7%

Over the past year, the company reported a steady 6.0% increase in organic growth, equally divided across higher volumes and pricing. Total sales grew only by 2.0% as adverse foreign exchange movements shaved off 4.0% of total sales, mainly due to the devaluation in Venezuela.

Note that the company is truly a global, achieving roughly 50% of its sales in emerging markets. The emerging market operations reported organic sales growth of 10.0% for the year of 2012.

Despite the difficulties in Venezuela, Colgate's performance was good. Gross margins for the year of 2012 rose by 80 basis points to 58.1% as higher prices and costs savings more than offset increases in raw materials and packaging. The $1.1-$1.25 billion 2012 Restructuring program will result in annual cost savings of $275-$325 million after tax per annum in the coming years.

The growing middle class across the world and dominant market positions result in rosy long-term conditions for Colgate. For 2013 the company expects 6-7% sales growth and another 50 basis point increase in gross margins, which should result in 10-11% earnings growth.

The low interest rate environment and global economic uncertainty has resulted in strong demand for high-yielding global consumer companies. Valued around 20 times annual earnings, the global investment community has pushed up shares of Colgate a little too high in their search for yield and safety. Yet the long-term prospects of the company remain extremely favorable. I am a buyer on dips towards $100-$105 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.