Colgate-Palmolive: Doing Everything Right

| About: Colgate-Palmolive Co. (CL)

Colgate-Palmolive (NYSE:CL) has one of the most recession-resistant portfolios of products of all consumer goods companies. Think back to the recent recession. Did you or anyone you know change brands of toothpaste or the frequency with you brushed? Did you stop using soap on your body or in your sink, did you swap out for a less expensive brand? Finally, did you stop feeding your pets animal food? For the vast majority of the population, the answer to that question was "no", and that's Colgate-Palmolive's secret. They have a portfolio of products that is very recession-resilient. That's important because that makes the dividend recession-resilient as well, when coupled with a <50% payout ratio and healthy growth history, Colgate-Palmolive becomes an attractive dividend growth investment.


Colgate-Palmolive company is a consumer products company whose products are marketed in over 200 countries and territories throughout the world. It operates in two segments: Oral, Personal and Home Care and Pet Nutrition. Oral Care business products include Colgate Total, Colgate Sensitive Pro-Relief, Colgate Max Fresh, Colgate Optic White and Colgate Luminous White toothpastes, Colgate 360° manual toothbrushes and Colgate and Colgate Plax mouth rinses. Colgate's Oral Care business also includes dental floss and pharmaceutical products for dentists and oral health professionals. Its Personal Care products also include Palmolive, Softsoap and Sanex brand shower gels, Palmolive, Irish Spring and Protex bar soaps and Speed Stick, Lady Speed Stick and Sanex deodorants and antiperspirants. It sells liquid hand soap under the Palmolive, Protex and Softsoap brands. Colgate, through its Hill's Pet Nutrition segment (Hill's), manufactures pet nutrition products for dogs and cats.


2008 2009 2010 2011 2012
Revenue $15,330 $15,327 $15,564 $16,734 $17,085
% Growth n/a 0.0% 1.5% 7.5% 2.1%
Gross Profit 8,685 9,008 9,204 9,634 9,939
% Margin 56.7% 58.8% 59.1% 57.6% 58.2%
EBITDA 3,634 3,999 4,162 4,285 4,417
% Margin 23.7% 26.1% 26.7% 25.6% 25.9%
Net Income 1,957 2,291 2,203 2,431 2,472
Avg Diluted Shares 1,070.0 1,049.2 1,021.8 984.0 960.2
% Growth n/a -1.9% -2.6% -3.7% -2.4%

Note: All figures are MM's (except per share data) unless noted otherwise

Colgate-Palmolive has performed well over the past five years, with EBITDA expanding each and every year (as well as in the LTM Period). The company's revenue contracted only once slightly in 2009. In spite of the one-year contraction, the company managed a positive compounded annual growth rate of 2.7% over the past four years. The gross margin has trended positively, while also staying within a tight 2.5% range over the past five years (bottoming at 56.7% and peaking at 59.1%). Similarly, EBTIDA margins have expanded from 23.7% in 2008 to 25.9% in 2012, resulting in EBITDA expansion from $3,634MM in 2008 to $4,417MM in 2012 (22% expansion) over the five-year period.

Per Share Data

2008 2009 2010 2011 2012
Revenue $14.33 $14.61 $15.23 $17.01 $17.79
% Growth n/a 2.0% 4.3% 11.6% 4.6%
Gross Profit 8.12 8.59 9.01 9.79 10.35
EBITDA 3.40 3.81 4.07 4.35 4.60
Net Income 1.83 2.18 2.16 2.47 2.57
Dividends 0.78 0.86 1.02 1.14 1.22
Payout Ratio 42.6% 39.4% 47.1% 45.9% 47.4%
Dividend Growth n/a 10.3% 18.0% 11.8% 7.5%

Note: Per share data based on weighted average diluted shares outstanding.

On a per share basis, the company has performed even better. The company has changed its weighted average shares outstanding through share redemption from 1,070MM to 960MM over the period (a 10.3% decrease), resulting in a more favorable performance on a per share basis. EBITDA per share has expanded from $3.40 to $4.60 (a 35% increase as compared to a 22% increase at the company level). The company's dividends per share have been growing, increasing from $0.78 per share in 2008 to $1.22 per share in 2012 (a 56% increase or an 11.8% compounded annual growth rate) while maintaining a stable payout ratio in the 40-50% range.


Market/Par Value EBITDA Multiple
- Cash and Equivalents $868 0.2x
+ Total Debt $5,284 1.1x
+ Market Capitalization $59,861 12.9x
Total Enterprise Value $64,500 13.9x

Note 1: Based on TTM EBITDA of $4,649MM as of 9/30/13.

Note 2: Market Cap based on 925.2MM shares outstanding and a $64.70 market price as of 1/17/14.

Colgate-Palmolive has a lightly leveraged capital structure. The company is levered at 1.1x TTM EBITDA (0.9x net of cash), with a total enterprise value of 13.9x TTM EBITDA. Ideally, the company would incur a little bit of low-cost debt to leverage its equity returns. Even with moderate leverage, the company would have a low cost of debt and maintain significant financial flexibility while enhancing returns to the equity holders.


2013 2014 2015 2016 2017
EBITDA $4,561 $4,921 $5,690 $5,690 $5,690
% Growth 3.3% 7.9% 15.6% 0.0% 0.0%
Interest Expense 60 60 60 60 60
Taxes 1,321 1,427 1,652 1,652 1,652
Capital Expenditures 654 706 816 816 816
Dividends 1,258 1,258 1,258 1,258 1,258
Add'l FCF $1,267 $1,470 $1,902 $1,902 $1,902

Note: All figures are MM's (except per share data) unless noted otherwise. Consensus Estimates only relate to EBITDA projections. All other assumptions are based on unadjusted LTM actuals.

The consensus estimates for Colgate-Palmolive are aggressive projecting a growth rate between 15.6% and 3.3% annually through 2015 at the EBITDA line (projections unavailable for 2016 and 2017). Under the consensus case, the company is projected to have significant additional free cash flow available to reinvest in the business, repurchase shares (always assumed for modeling purposes), or increase the dividend.

2013 2014 2015 2016 2017
Add'l FCF $1,267 $1,470 $1,902 $1,902 $1,902
Share Redemption Price $74.41 $85.57 $98.40 $113.16 $130.13
Shares Redeemed 17.0 17.2 19.3 16.8 14.6
Wtd Avg Diluted Shares 925.2 908.0 888.7 871.9 857.3
Dividends Per Share $1.36 $1.39 $1.42 $1.44 $1.47
Dividend Growth 11.5% 1.9% 2.2% 1.9% 1.7%

The share redemptions are assumed to be at a 15% annually compounded price. I believe that this is structured very conservatively. If the weighted average redemption price exceeded this threshold, the investors would have ample opportunity and time to re-evaluate their position and consider selling their position for a gain from today's price. The company's share redemption would allow for a 2% increase in the dividend annually from the share redemptions alone. Additionally, the company's payout ratio would decline, as the dollar amount of dividends paid would not be increasing while the company's earnings (using EBITDA as a proxy) would be increasing.

If the company performs in line with the consensus estimates and pays dividends/redeems shares as outlined above, the company would achieve the IRR/Cash on Cash returns illustrated below based on the outlined terminal EBITDA multiples.

Returns Based on Terminal EBITDA Multiple

11.4x 11.9x 12.4x 12.9x 13.4x 13.9x
IRR 3.7% 4.9% 6.0% 7.1% 8.2% 9.7%
Cash on Cash 1.15x 1.20x 1.25x 1.30x 1.35x 1.43x


The most attractive feature of Colgate-Palmolive is its portfolio of products. The company's products are so basic and intimate that even during a recession consumers are hesitant to switch them out like they might with other lower-priced frequently private label offerings within other segments of consumer goods. If we tack on reasonable EBITDA growth in 2016 and 2017, it's fairly easy to see where double-digit returns will come over the next five years. Further, the company has a history of increasing the dividend over the past 50 years (and recently at a fairly healthy clip), a very reasonable ~50% payout ratio and a current yield of 2.1% as compared to the S&P 500 (NYSEARCA:SPY) at 1.8%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CL, over 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.