Evaluating Colgate-Palmolive

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 |  Includes: CL, SPY
by: World's Best Stocks

With Colgate-Palmolive Company (NYSE:CL) trading near its year low and with a return of -6.66% as of September 10, 2010, while the market is up by 1.47% for the same period, we take this opportunity to analyze the past of CL in order to figure where the value of the stock could be in 2020.

At $75.18, CL is trading at 2.82% from its year low of $73.12 and at 13.97% from its year high and all time high of $87.39. CL is not a volatile stock. A non-volatile stock doesn’t necessarily mean bad returns for the investor and/or no enrichment. The volatility of CL is measured by its beta ratio of only 0.51, which signifies that the stock has a theoretical volatility 49% lower than the market.

We compared the return of CL with the market (NYSEARCA:SPY) from the years 1994 to 2010 YTD (as of September, 10). All paid dividends are included in the return.

Civil year

Colgate-Palmolive Company

Market (SPY)

1994

7.16%

0.33%

1995

16.91%

37.71%

1996

37.33%

22.35%

1997

64.55%

33.35%

1998

29.56%

28.49%

1999

42.98%

20.32%

2000

0.54%

-9.70%

2001

-9.49%

-11.78%

2002

-7.97%

-21.54%

2003

-2.82%

27.88%

2004

4.14%

10.54%

2005

9.38%

4.70%

2006

21.22%

15.61%

2007

21.64%

5.16%

2008

-10.08%

-36.38%

2009

22.37%

26.05%

2010 (as of September, 10)

-6.66%

1.47%

Click to enlarge

An investment made in CL on December 31, 1993 had a return of 556.54% on September 10, 2010, while an investment in the market, for that same period, had a return of 203.51%. If we look at the last 10 years, an investment made in CL on December 31, 1999 had a return of 35.13% on September 10, 2010, while an investment in the market, for that same period, had a return of -9.25%. All the paid dividends are included in those returns.

As you can see, over the 17 periods observed, CL outperformed the market 12 times. We can consider CL as a safe company considering that over a period of approximately 17 civil years, its worst return per year has been -10.08%, and it was during the crisis of 2008, while the market was negative by 36.38% on that year. We noticed that CL never underperformed the market more than 2 years in a row over that period of 17 years. The stock underperformed the market in 2009 and 2010 YTD...

Let’s have a look at the past EPS, dividend per share and payout ratio of CL in the first table and at the EPS and dividend growth in the second one. (All amounts are split adjusted for the 2-for1 stock split of July 1, 1999 and for the 2-for-1 stock split of May 16, 1997.)

Year

Diluted EPS

Dividend per share

Payout

1995

$0.25

$0.44

176.00%

1996

$0.98

$0.47

47.96%

1997

$1.13

$0.53

46.90%

1998

$1.30

$0.55

42.31%

1999

$1.47

$0.59

40.14%

2000

$1.70

$0.63

37.06%

2001

$1.89

$0.675

35.71%

2002

$2.19

$0.72

32.88%

2003

$2.46

$0.90

36.59%

2004

$2.33

$0.96

41.20%

2005

$2.43

$1.11

45.68%

2006

$2.46

$1.25

50.81%

2007

$3.20

$1.40

43.75%

2008

$3.66

$1.56

42.62%

2009

$4.37

$1.72

39.36%

2010

$4.30 (estimated)

$2.03

44.15% (TTM)

Click to enlarge

Civil Year

Diluted EPS growth

Dividend growth

1995 to 1996

292.00%

6.82%

1996 to 1997

15.31%

12.77%

1997 to 1998

15.04%

3.77%

1999 to 2000

15.65%

6.78%

2000 to 2001

11.18%

7.14%

2001 to 2002

15.87%

6.67%

2002 to 2003

12.33%

25.00%

2003 to 2004

-5.28%

6.67%

2004 to 2005

4.29%

15.63%

2005 to 2006

1.23%

12.61%

2006 to 2007

30.08%

12.00%

2007 to 2008

14.38%

11.43%

2009 to 2010

N/A

18.02%

Click to enlarge

The 2010 estimated EPS reflects a 2010 Q1 EPS of $0.69, a Q2 EPS of $1.17, a Q3 EPS of $1.19 and a Q4 EPS of $1.25 (Average analyst estimates for Q3 & Q4). From 1996 to 2009, the compound annual growth rate was 12.19% for the company’s EPS. If we take 1995 as a starting year, the company increased its dividend each year since 1995. The compound annual growth rate of dividend of CL has been 10.73% from 1995 to 2010, which is excellent. Over the last 5 years, CL increased its dividend by at least 11.00% each year, with the highest rise of the period in 2010 at 18.02%.

The payout ratio of CL is actually at 44.15%. The average payout ratio for the years 1996 to 2010 has been 41.81%. With an annual dividend of $2.12, a TTM EPS of $4.19, a payout ratio of 44.15%, slightly above the average of 15 years, the company has flexibility to increase the dividend and this one is safe. The current yield of CL is 2.82% while the current yield of the market is 1.89%.

As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year after year to ensure their long term potential growth. Here are the Colgate-Palmolive’s sales by year from 1995 to 2009.

Year

Sales

1995

$8,358,200,000

1996

$8,749,000,000

1997

$9,056,700,000

1998

$8,971,600,000

1999

$9,118,200,000

2000

$9,357,900,000

2001

$9,427,800,000

2002

$9,294,300,000

2003

$9,903,400,000

2004

$10,584,200,000

2005

$11,396,900,000

2006

$12,237,700,000

2007

$13,789,700,000

2008

$15,329,900,000

2009

$15,327,000,000

Click to enlarge

The compound annual growth rate of sales of CL has been 4.42% over the period 1995-2009. Over the same period, the growth rates of the EPS and the dividend of CL have been superior to the growth rate of the sales. What is important is we can clearly see an uptrend in the company’s sales on a long period.

Let’s have a look at the historic P/E of CL.

Year

P/E at year-end

1995

65.57

1996

22.49

1997

31.63

1998

35.20

1999

44.10

2000

37.97

2001

30.56

2002

23.94

2003

20.35

2004

21.96

2005

22.57

2006

26.52

2007

24.36

2008

18.73

2009

18.80

2010 YTD

17.94 (TTM P/E)

Click to enlarge

The current TTM P/E of CL is 17.94. As you can see, the P/E has a down trend since 1999, like many of US stocks. The actual TTM P/E is the lowest observed over the period of 16 years.

For the measure of the profitability, CL has a TTM profit margin of 13.87%. The TTM operating margin is 22.54%. The average TTM profit margin for the Household & Personal Products Industry is 12.30% and 18.98% for the TTM operating margin (4 companies compared). CL is above for both.

For the measure of the financial strength, the MRQ (most recent quarter) current ratio is 1.29 for CL. The average MRQ current ratio for the Household & Personal Products Industry is 0.94 (4 companies compared). The company has a Debt/Equity ratio (MRQ) of 1.28.

The better way to predict the future is to look at the past; this is why we analyzed the past of CL. Now, we will use the past to extrapolate what would be the return in 2020 of an investment made in CL today.

Our first scenario is a more conservative one. We previously saw that from 1996 to 2009, the compound annual growth rate was 12.19% for the company’s EPS and the compound annual growth rate for the company’s dividend has been 10.73% from 1995 to 2010. Let’s say we are more conservative and we figure a growth rate of 8% per year for both the EPS and the dividend for the coming years until 2019.

Year

Estimated EPS (growth of 8%)

Estimated dividend (growth of 8%)

2010

$4.30 (estimated)

$2.03 ($0.53 remaining)

2011

$4.64

$2.19

2012

$5.02

$2.37

2013

$5.42

$2.56

2014

$5.85

$2.76

2015

$6.32

$2.98

2016

$6.82

$3.22

2017

$7.37

$3.48

2018

$7.96

$3.76

2019

$8.60

$4.06

Click to enlarge

The investor who invests in CL will pocket an estimated income of dividend of $27.91 until December 31, 2019 assuming an 8% growth of the dividend of the company. Here are 3 possibilities of the value of the stock price at the end of 2019, assuming different P/E ratios based on an EPS growth of 8% and an investment in CL based on the current price of $75.18.

With a P/E of 13: EPS of $8.60 X 13=$111.80; return: 85.83% (paid dividends included) (Compound annual return of 7.12%)

With a P/E of 15: EPS of $8.60 X 15=$129.00; return: 108.71% (paid dividends included) (Compound annual return of 8.52%)

With a P/E of 17: EPS of $8.60 X 17=$146.20; return: 131.59% (paid dividends included) (Compound annual return of 9.78%)

Our second scenario is a more aggressive one. Let’s figure a growth rate of 10% per year for both the EPS and the dividend for the coming years until 2019.

Year

Estimated EPS (growth of 10%)

Estimated dividend (growth of 10%)

2010

$4.30 (estimated)

$2.03 ($0.53 remaining)

2011

$4.73

$2.23

2012

$5.20

$2.46

2013

$5.72

$2.70

2014

$6.30

$2.97

2015

$6.93

$3.27

2016

$7.62

$3.60

2017

$8.38

$3.96

2018

$9.22

$4.35

2019

$10.14

$4.79

Click to enlarge

The investor who invests in CL will pocket an estimated income of dividend of $30.86 until December 31, 2019 assuming a 10% growth of the dividend of the company. Here are 3 possibilities of the value of the stock price at the end of 2019, assuming different P/E ratios based on an EPS growth of 10% and an investment in CL based on the current price of $75.18.

With a P/E of 13: EPS of $10.14 X 13=$131.82; return: 116.39% (paid dividends included) (Compound annual return of 8.95%)

With a P/E of 15: EPS of $10.14 X 15=$152.10; return: 143.36% (paid dividends included) (Compound annual return of 10.38%)

With a P/E of 17: EPS of $10.14 X 17=$172.38; return: 170.34% (paid dividends included) (Compound annual return of 11.68%)

The fundamentals of the company are all great: low volatility, good past return of the stock, current yield at 2.82%, safe and rising dividend, growing EPS, correct P/E, profit margin and operating margin above the industry. Moreover, assuming our 2 scenarios of the growth rate of the company’s EPS and dividend for the coming years, the potential return would be in the range of 85.83% to 170.34% (compound annual return of 7.12% to 11.68%).

Those return expectations are not bad at all for a safe stock and the fact that CL is trading at 2.82% from its year low is an opportunity to profit from the great fundamentals of the company.

Source for industry group: Morningstar, Inc.

Disclosure: Long CL and SPY