Colgate-Palmolive: Dividend Stock Analysis

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. It operates in two segments, Oral, Personal, and Home Care; and Pet Nutrition. The company is a Dividend Achiever and a Champion. Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895 and increased payments to common shareholders every year for 46 years.

From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 5.90% to its shareholders. While the stock has largely remained flat for the majority of the past decade (except for the breakout in the stock price in 2007) most of the returns came from reinvested dividends.

At the same time company has managed to deliver an impressive 10.70% average annual increase in its EPS since 1999.
The ROE has consistently remained high, ranging between 57% and 475% over the past decade.Annual dividends have increased by an average of 11.40% annually since 1999, which is slightly higher than the growth in EPS. An 11 % growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1977, Colgate Palmolive has actually managed to double its dividend payment every eight years on average. Just a few weeks ago Colgate Palmolive boosted its dividend by 10% for the 46th year in a row. The dividend is very well covered at the moment.

The dividend payout has ranged between a high of 51% in 2006 and a low of 33% in 2002. One positive fact is that the payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Despite the low dividend payout ratio and low P/E ratio, I require a dividend yield of at least 3% in order to initiate a position in Colgate Palmolive. Currently the yield is at 2.80%, and price earnings ratio is 17.

In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Clorox (CLX) trades at a P/E multiple 14 while yielding 3.60%.

I would consider initiating a position in Colgate Palmolive on dips below $58.66.

Disclosure: Long PG, KMB and CLX

Comments

[Chinese Foo...:]

But the stock is closer to $71?

Jun 06 06:30 AM

[Michael D.:]

Correct. Why get into this at $71, P/E 17 when you can buy competitors at P/E 14 and higher yields?

Jun 06 08:37 AM

[gareth:]

Hi Michael D. I enjoy and find your postings to be informative. Just a general question do you feel the market fairly equates yeild and risk? The reason I'm asking is I am considering initiating a position in a high yeilding investment trust in Canada ALA.UN.TO. The dividend seems well covered and i am relatively bullish on the energy sector. Prior to the pullback in November the yeild had averaged closer to 7% and revenue has not fallen significantly. They have a large percentage of the alberta market and seem to be diversifying into renewables. Of course I'm looking for reasons not to invest and weigh them accordingly. If you have time I appreciate it. Thanks for the info. again. Gareth

Jun 07 02:36 AM

[RandomFunda...:]

For the Canadian fella, is there any new development with regard to the tax treatment of dividends by those trusts? Its been a couple of years, but last time I looked at the sector the PM delivered a fairly substantial blow to the sector that was previously a tax haven... I thought the new tax rules were going into effect 2010 which could be why the stock is trending down.

Jun 07 04:26 AM

[Deegan:]

I believe the change in taxes comes in 2011 for Canadian Trusts. I do not know about ALA.UN since I haven't researched it. I do own PMBIF, Pembina Pipeline which is paying 12% (monthly) and WTSHF Westshore Terminal which is paying 9.4%. Even with the change in tax law, if in fact it does change, because of the poor economy, there is talk of delaying the change or even canceling it, the dividends will remain high enough to pay the tax and still have a handsome ROI. In comparison to Colgate Palmolive which pays a paltry 2.8% even though they brag about doubling its dividend payment every 8 years. Big deal. I don't care how well they have their dividend covered and if they increase it by 10% every year. How does anyone live on 2.8% a year.

We are in this investing business to make money. Pembina Pipeline will likely assume a larger position in my retirement folder in the near future. I am watching to see what happens on the next treasury bond auction to see if China will continue to support our massive deficit spending..

Jun 07 06:44 PM