Colgate-Palmolive: My Definition Of A Quality Stock

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 |  About: Colgate-Palmolive Co. (CL)
by: Brad Kenagy

Summary

I use seven factors I believe make up a quality stock to screen for stocks that posses all those factors.

To screen for stocks, I looked for common holdings of select ETFs, along with other selected data.

Colgate-Palmolive was the only company that met all seven of my criteria for being a quality stock.

In this article, I will be looking for stocks that I define as quality stocks. I read a recent article by a fellow SA author, and thought I would come up with my own way to look for quality stocks. I define quality as possessing all the factors from the list below.

  • Strong Fundamentals
  • Capital Strength
  • Low Volatility
  • Dividend Growth
  • Buybacks
  • Strong Corporate Governance
  • Crisis Performance

For the first five factors from the above list, I will be using the holdings for select ETFs, and then I will combine the holdings for each corresponding ETF and see what stocks are held in all five.

Strong Fundamentals

For this factor, I chose to use the holdings of the iShares MSCI USA Quality Factor ETF (NYSEARCA:QUAL). QUAL has 127 holdings, and the reason I chose to use QUAL was that to be included in the ETF a stock must posses the following qualities:

  • High ROE
  • Stable Earnings
  • Low Financial Leverage

Capital Strength

For this factor, I chose to use the First Trust Capital Strength ETF (NASDAQ:FTCS). FTCS has 50 holdings, and the reason I chose to use FTCS was that it had the added criteria of having a large cash position and low long-term debt, to go along with some common criteria with QUAL. The main capital strength criteria are listed in the list below. [From FTCS Fund Page]:

  • At least $1 billion in cash or short-term investments.
  • Long-term debt to market cap ratio less than 30%.
  • Return on equity greater than 15%.

Low Volatility

For this factor, I chose to use the PowerShares S&P 500 Low Volatility Portfolio ETF (NYSEARCA:SPLV). SPLV has 100 holdings, and the reason I chose to use SPLV was that it only selects the stocks in the S&P 500 with the lowest volatility over the past year.

Dividend Growth

For this factor, I chose to use the ProShares S&P 500 Aristocrats ETF (NYSEARCA:NOBL). NOBL has 54 holdings, and the reason I chose to use NOBL was that it only owns companies that have paid growing dividends for the last 25 years.

Share Buybacks

For this factor, I chose to use the AdvisorShares TrimTabs Float Shrink ETF (NYSEARCA:TTFS). TTFS has 100 holdings, and the reason I chose to use TTFS was that the fund "focuses on stock prices as a function of supply and demand."[TTFS Fund Summary] Simply put, TTFS looks for companies with strong fundamentals that are reducing share the share count.

Common Holdings of five ETF selections

After combining all the holdings into a spreadsheet, I found that five companies were included in all five ETFs. Those five companies are Colgate-Palmolive (NYSE:CL), Illinois Tool Works (NYSE:ITW), Kimberly-Clark Corporation (NYSE:KMB), McDonald's (NYSE:MCD), and 3M (NYSE:MMM). I then took these five companies and looked at the final two factors to see what company ranked the highest in corporate governance, and which had the best performance during the financial crisis.

Corporate Governance

I took the five companies that made my initial list and looked the governance rating from the Institutional Shareholder Services website, and the results for each are in the table below. The governance score ranges from 1-10, 1 being low governance risk, and 10 being high governance risk. Two companies Colgate-Palmolive and 3M had the best governance score so they made it to my final step.

 

Governance Score

CL

1

ITW

4

KMB

3

MCD

6

MMM

1

Click to enlarge

Crisis Performance

For my final step, I looked at the price performance of Colgate-Palmolive and 3M, from the last peak in the market to the bottom. My logic behind that is if another serious market correction were to occur, the past performance might shed light on how each stock might act. I used the starting date of October 9 2007, which was the high in the S&P 500(NYSEARCA:SPY), and for the end date, I used March 9 2009, which was the low for the S&P 500. I found that over that period, Colgate-Palmolive posted a return of -24.44%, while 3M posted a return of -56.00%. Based on the performance, Colgate-Palmolive is the clear winner of my crisis performance test.

Closing Thoughts

Overall, I believe my seven-step process was effective in finding stocks that had characteristics of being quality stocks. The only stock I found that met my definition of a quality stock was Colgate-Palmolive, because it possesses characteristics from all seven factors I was looking for when I started my search.

Disclaimer

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.