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Summary

  • Colgate-Palmolive (NYSE:CL) is a stable, growing company with impressive international sales in a highly competitive but recession-resistant industry. It has an excellent market share of oral and personal care, as well as pet nutrition.
  • Five year annualized company revenue growth: 7%
  • Five year annualized company earnings growth: 11%
  • Dividend yield: 2.70%
  • Five year annualized dividend growth rate: 13%.
  • The balance sheet is leveraged, but reasonable, with a total debt/equity ratio of 1.37.
  • The P/E is a bit high at over 18. I’d find this stock attractive in the lower $70s range.

Overview

Colgate was founded in 1806 in New York as a soap and candle company. Colgate-Palmolive is now a multinational corporation selling oral hygiene products, soaps, and pet nutrition products. The company currently has a market capitalization of over $37 billion and over 38,000 employees.

Products include Colgate toothpastes and toothbrushes, Palmolive soap, Softsoap, Speed Stick, Irish Spring, and Science Diet, in addition to many more.

Business Segments and Divisions

Colgate-Palmolive consists of two business segments: Oral, Personal, and Home Care, and Pet Nutrition. The company can be understood as consisting of five business divisions, since the Oral, Personal, and Home Care segment is broken down into four geographic regions.

North America
The North American division represents 19% of total company sales. Sales of this segment grew 3.5% for 2009 compared to 2008. Colgate holds over 36% of the toothpaste market share and over 32% of the manual toothbrush market share.

Latin America
The Latin America division represents 28% of sales. Sales of this segment grew by 5.5% for 2009 compared to 2008. Colgate reported very strong sales for their premium-priced oral care products in this segment.

Europe/South Pacific
The Europe/South Pacific division represents 22% of sales. Sales of this segment decreased by 8% for 2009 compared to 2008, but unit volume was static.

Greater Asia/Africa
The Asia/Africa division represents 17% of sales. Sales of this segment remained static between 2008 and 2009. Oral products make up over two-thirds of this division’s sales.

Hills Pet Nutrition
The Hills Pet Nutrition segment represents 14% of sales. Products include Science Diet pet food and Prescription Diet specialty nutrition products. Sales decreased by 0.5% for 2009, but volume was down 7.5% from 2008. The company reports that this was because it raised prices to offset commodity costs.

Breaking the numbers down another way, Oral Care sales represent 41% of total Colgate worldwide sales, Personal Care sales represent 22% of the total, Home Care sales represent 23% of the total, and Pet Nutrition makes up 14% of the total.

Revenue, Earnings, Cash Flow, and Margin

The company has an impressive and consistent growth record.

Revenue Growth

Year Revenue
2009 $15.327 billion
2008 $15.330 billion
2007 $13.790 billion
2006 $12.238 billion
2005 $11.397 billion
2004 $10.584 billion

Annualized revenue growth over this five year period has been over 7%, which is great. The lack of growth between 2008 and 2009 looks concerning, but the annual report states that organic growth was actually 6.5% when adjusted for acquisitions, divestitures, and foreign exchange rates.

Earnings Growth

Year Earnings
2009 $2.291 billion
2008 $1.975 billion
2007 $1.737 billion
2006 $1.353 billion
2005 $1.351 billion
2004 $1.327 billion

CL has impressively grown earnings by nearly 11% per year on average during this period. EPS has grown a bit faster than company-wide earnings due to share repurchases.

Operating Cash Flow Growth

Year Cash Flow
2009 $3.277 billion
2008 $2.302 billion
2007 $2.252 billion
2006 $1.864 billion
2005 $1.836 billion

The big jump of operating cash flow for 2009 looks like it will be balanced out by decreased cash flow for 2010. It seems to mostly be a timing issue, with large increases of payables and decreases of inventory in 2009, and the opposite for the first two quarters of 2010. The healthy and growing cash flow over this period is promising.

Metrics

CL has a net profit margin of 14%, which puts it on par with Procter and Gamble (NYSE:PG) and ahead of Clorox (NYSE:CLX) and Church & Dwight (NYSE:CHD).

Return on Equity is a massive 95%, but the debt has a large part to play in this number. Return on Investments is 34%. The company seems to be using its value quite effectively.

Dividends

Colgate-Palmolive currently yields over 2.70% with high dividend growth, and has increased dividends for the past 47 consecutive years. They have paid uninterrupted dividends to shareholders since 1895. The payout ratio is currently a moderate 44%.

Dividend Growth

Year Dividend Yield
2010* $2.03 2.60%
2009 $1.72 2.40%
2008 $1.56 2.20%
2007 $1.40 2.00%
2006 $1.25 2.10%
2005 $1.11 2.20%

Over this five year period, CL has grown its dividend by nearly 13%. The most recent increase, from $0.44 to $0.53 per quarter, was a huge 20% increase.

*Expected based on the current payment pattern.

Balance Sheet

Colgate-Palmolive’s balance sheet is reasonable, but not as impressive as I would like, with a total debt to equity ratio of 1.37. The debt is very safe with a high interest coverage and the recession-resistant nature of the business, and if growth continues at or near the current pace, then the leverage will have been worthwhile.

Investment Thesis

Colgate-Palmolive is a very high-quality and diverse international company. Approximately 75% of sales come from outside of the United States despite this being a US company. Their products boast high market shares of their respective markets, and are very attractively packaged in line with their high brand quality.

The fact that most of the sales of this company come from abroad allows North American investors to participate in the faster growth of some foreign markets. Many blue-chip stocks have a big chunk of revenue coming from abroad, but few of them have this high of a percentage of international revenue. Colgate-Palmolive markets their products in over 200 countries and territories.

Dividend growth is a great sign for investors, and the 20% dividend growth of this year is about as clear of a sign as one can get from management. The company also returns value to shareholders by buying back company shares, and in fact management spends nearly as much money on share repurchases as they do on dividend payments. I’m not particularly fond of this level of share repurchases for this company. Their shares have a P/E of over 18, so they’re not getting a great value for the money. I’d prefer that they continually boost the dividend up to a yield of over 3% and tone down the share repurchases a bit.

Colgate-Palmolive reinvests income into developing new and better products. Money spent on research and development was $247 million in 2007, $253 million in 2008, and $269 million in 2009. One of Colgate’s newer products is the Colgate Wisp, a small and portable disposable toothbrush that can be used without water.

Risks

Like any company, CL has risks. Their business is fairly recession-resistant, offering high quality basic products, but they face continual risk from foreign exchange rates, commodity costs, and cheaper product alternatives, as well as strong competition from other top brands. In addition, the stock valuation is somewhat high, so if the company faces a slow-down in growth, the stock price may suffer. No single customer represents 10% or more of total sales, and no single supplier or packaging material represents a large percentage of total material requirements of the company.

Conclusion and Valuation

Currently, I think Colgate-Palmolive is a great company at a mediocre price. Over the long-term, I think this investment looks promising, but I’d prefer to see the company with a stock valuation closer to $70 or even in the $60s during this time so that the P/E would be a slightly lower 16 or 17. The dividend yield is modest, but dividend growth is very high, and the payout is safe. The most recent increase of 20% is an excellent sign for investors.

Disclosure: I do not have any position in CL at the time of this writing.

Source: Colgate-Palmolive Dividend Stock Analysis: A Great Company at a Mediocre Price