The Household Products Industry is a collection of diverse companies. They manufacture consumer goods used in and around the home and offer their products to a broad range of wholesalers and retailers. Consequently, diversity is a key feature of this group of companies. Household Products companies have a long roster of goods, spanning the brand-name and private-label categories that keep their wide customer base happy. Because they perform well, returning huge gains during good economic times, providing solid downside protection, and retaining the ability to sustain returns in challenging periods, Household Products equities can be classified as defensive investments. As producers of basic items required as daily necessities, such as toothpaste, milk, soap and laundry detergent, companies in this industry produce consistently solid results, regardless of the current economic climate.
In this article, I pick one of the best companies operating in this industry, Colgate-Palmolive Company (CL). I'll look at its business model, business strategy and financial situation to determine whether it is a good stock to hold in 2014 as well as whether this company has the ability to sustain returns.
Colgate-Palmolive Company is a consumer products company focused on two product segments: Pet Nutrition and Oral, Personal and Home Care. Operationally, Colgate-Palmolive is structured along geographic positions with management teams having responsibilities for the business results in each county. All in all, Colgate-Palmolive competes in over 200 countries worldwide, contributing to the company's sales and success. Around 80% of net sales are coming from markets outside the U.S., with around 50% of net sales coming from emerging markets that include Latin America, Asian regions, Africa and Central Europe. This geographic diversity helps to lessen the company's exposure to business risks in any one part of the world.
With its diversified business model, Colgate-Palmolive's business strategy seeks to capture opportunities for growth by spotting and meeting changing consumer needs within its core categories. It is also consistently focusing on innovation and the deployment of consumer insights into the development of new products regionally, which are then marketed out on a worldwide basis. To augment these efforts, Colgate-Palmolive has developed key plans to build relationships with consumers, retail customers and dental and veterinary professionals. Growth opportunities are better in those regions of the globe in which economic development and increasing consumer incomes enlarge the dimension and number of markets for their products.
To support its growth plans, investments needed to support growth are generated through continuous initiatives to lower costs and enhance effective asset utilization along with capital spending. With these growth-funding initiatives, the company has become even more efficient and well-organized throughout its businesses. Colgate-Palmolive also continues to prioritize its investments toward higher margin businesses, particularly Oral Care, Personal Care and Pet Nutrition. Within these segments, Colgate-Palmolive follows a strategy to develop and enlarge market positions in key product categories. The products are then prioritized based on their capability to maximize the use of the company's core competencies and their ability to generate sustainable long-term growth.
With its diversified business model and relatively safe and progressive business strategy, Colgate-Palmolive's growth momentum continued on both the top and bottom lines. At the end of the recent quarter, its top line increased by 1.5% and bottom line growth stands at 3%. For the tenth successive quarter, operating earnings and net income both increased over the past year quarter. Importantly, its organic sales increased by 6.0%, with positive organic growth in many operating divisions and emerging markets, where organic sales grew by 9.5%.
On a year-to-date basis, Colgate-Palmolive's global market shares in manual toothbrushes and toothpaste continues to be strong at 33.4% and 45.0%, respectively. Also, year to date, the company continues to make great progress in mouthwash, as its worldwide market share in this category recently reached a record high of 16.8%, up 130 basis points over the prior year. The company has also increased its investment in advertising, both absolutely and as a percent to sales to support its product portfolio. This business strategy is working so far and, looking forward, the company anticipates a strong year ahead, with strong organic sales and gross margin growth, and EPS likely to grow by 4.5% to 5.5% for the year.
Further, the company has the potential to generate strong cash flows, as represented by its high price to cash flow ratio of 17.6. With a potential to generate such massive cash flows, Colgate has been able to increase quarterly dividends by 71% over the past five years. Its current cash flows are not only providing cover to dividends, but also offering room for further increases. In the TTM, its free cash flows are standing at $2.7 billion, while dividend payments are only at $1.3 billion. Also, in the TTM, it has repurchased $1.7 billion of shares, which will further enhance its EPS and dividends in coming days.
Where Other Players Stand
According to Yahoo Finance, Colgate-Palmolive is not involved in direct competition and has been competing with private labels. However, Procter & Gamble (PG) and Unilever Plc (UL) have some products that compete with offerings from Colgate-Palmolive.
Procter & Gamble provides branded consumer packaged goods. PG has a strong market share momentum, having brought a number of strong innovations to market. Likewise, with cost savings initiatives from productivity efforts continuing to build this momentum, the company is focused on driving innovation and productivity. With these plans, PG continues to pay hefty dividends and retains the ability to continue paying out in the coming days.
Unilever is a supplier of fast moving consumer goods. Its four principal areas of operations are: Personal Care, Foods, Home Care and Refreshment. At the end of the recent quarter, its underlying sales growth of 4.4% over the past nine months is also ahead of its markets. Emerging markets are this company's main driver of growth and, regardless of the current slow-down, these markets remain a major growth opportunity which the company is well-set to capitalize on. Unilever continues to speed up its innovations to build long-term growth and value. Its dividends also look sustainable with current growth levels.
The Household and Personal Products industry is a safe place for defensive investors and Colgate is one of the best companies operating in this lucrative industry. The company has a strong business model and a smart business strategy in place that will allow it to keep returning significant cash to shareholders.