Is Procter & Gamble Better Than Colgate For Your Dividend Portfolio?

Jul.17.14 | About: The Procter (PG)

Summary

Find out of Colgate is a better buy than Procter & Gamble for Dividend Growth Investors.

Colgate is growing revenue faster than Procter & Gamble.

Procter & Gamble has a significantly higher dividend yield.

Both businesses have a long history of rewarding shareholders with dividend increases.

Both businesses have extremely low volatility.

Procter & Gamble (NYSE:PG) and Colgate (NYSE:CL) are both multinational consumer product businesses. The two compete directly in the oral care industry. Procter & Gamble owns the Crest brand, while Colgate owns the brand of its own name. Procter & Gamble is larger than Colgate overall with a market cap of about $220 billion versus about $64 billion for Colgate.

This article examines Procter & Gamble and Colgate using the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing identifies high quality businesses trading at fair prices or better prices. The 8 Rules of Dividend Investing works by comparing businesses a long history of dividend payments to each other. This type of comparison creates a quantitative way to determine and rank high quality dividend stocks.

Consecutive Years of Dividend Payments

Procter & Gamble has increased its dividend payments for 58 consecutive years. This is one of the longest streaks of any publicly traded company.

Colgate has paid a dividend since 1895, and has paid increasing dividends for 51 consecutive years. Both Procter & Gamble and Colgate have very impressive long-term histories of profitable growth that show both companies can thrive under a variety of economic conditions and changing consumer preferences.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

  • Colgate has a dividend yield of 2.06%, the 80th highest out of 128
  • Procter & Gamble has a dividend yield of 3.16%, the 31st highest out of 128

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Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

  • Colgate has a payout ratio of 61.99%, the 91st lowest out of 128
  • Procter & Gamble has a payout ratio of 69.24%, the 101st lowest out of 128

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Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

The long-term growth rate of each business is calculated as the lesser of the 10-year per share growth in either dividends or revenue.

  • Colgate has a growth rate of 5.98%, the 45th highest out of 128
  • Procter & Gamble has a growth rate of 3.99%, the 72nd highest out of 128

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Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Long-term volatility for each business is calculated as the 10-year price standard deviation.

  • Colgate has a standard deviation of 19.51%, the 12th lowest out of 128
  • Procter & Gamble has a standard deviation of 17.83%, the 7th lowest out of 128

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Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Colgate Current Events & Growth Prospects

Colgate is the worldwide leader in toothpaste and toothbrush market share. The company has managed its brands extremely well, growing global market share in toothpaste, toothbrushes, and mouth wash continuously year after year.

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Source: Colgate Deutsche Bank Conference Presentation

Colgate's market share increases are driving the company's growth. Revenue has grown at around 6% since 2000. Revenue growth has actually increased in recent years for the company.

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Source: Colgate Deutsche Bank Conference Presentation

As Colgate's market share and revenue have grown, so has the company's gross margins. Gross margins have increased from 46.8% in 1993 to 58.6% for the first quarter of 2014. The company's margins peaked in 2010 at 59.1%. Colgate's long-term margin trend is favorable. It is rare for a business to grow market share, revenue, and margins at the same time over long periods.

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Source: Colgate Deutsche Bank Conference Presentation

Colgate grew constant currency revenue 6.5% for the first quarter of 2014. The company's growth came from increasing volume (5%), and price increases (1.5%). Organic revenues in emerging markets grew a strong 10% for the quarter. The company saw the strongest growth in its Latin America region which grew constant currency revenue 11% for the quarter. The company expects constant currency earnings per share to increase by about 10% for the full fiscal 2014.

Source: Colgate 2014 First Quarter Press Release

Colgate's future growth prospects remain bright. The company has a long growth runway ahead of it. Colgate's expansion into emerging and international markets began long ago and has gone very well. The company continues to gobble up market share throughout the world. Colgate's future remains bright as long as consumers are concerned with oral hygiene.

Procter & Gamble's Current Events & Growth Prospects

Organic sales for the 3rd quarter increased 3% year-over-year. This is in line with the company's long-term expected revenue growth of 3% to 4% going forward. The table below breaks down growth by division.

Division

Organic Sales Growth

Beauty

2%

Grooming

1%

Health Care

0%

Fabric Care and Home Care

6%

Baby, Feminine and Family Care

2%

Total P&G

3%

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Source: Procter & Gamble 3rd Quarter Earnings Presentation

Organic sales growth in Procter & Gamble's top 10 developing markets was up 8% in 2013, versus company-wide organic revenue growth of 3%. Procter & Gamble's developing markets make up 39% of total sales, while developed markets (US, Canada, Western Europe, & Japan) make up 61% of total sales. The company's strong emerging market growth in the 3rd quarter emphasizes Procter & Gamble's growing strength in emerging markets.

Procter & Gamble is overhauling its manufacturing and logistics supply chain in the US. The company is shifting from having many plants that make few items each, to few plants that make many items each. The consolidation will greatly improve logistics efficiency and reduce costs, resulting in higher operating margins for Procter & Gamble.

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Source: Procter & Gamble Goldman Sachs Presentation

Procter & Gamble is divesting the Iams, Eukanuba, & Natura pet food brands. The brands are being sold to Mars Incorporated for $2.9 billion in cash. Procter & Gamble's share of the pet care industry is only about 5%. The move is a step in the right direction for Procter & Gamble, as the company is divesting ancillary units to focus on its core business lines.

Source: Procter & Gamble Press Release

Procter & Gamble's future growth will be driven by emerging markets. Emerging markets are growing significantly faster than developed markets, and large multinational corporations like Procter & Gamble tend to have less market penetration in emerging markets compared to developed markets. The faster growth of emerging markets coupled with more opportunity for market penetration makes opportunities greater in the less developed parts of the world.

Final Thoughts

The 8 Rules of Dividend Investing ranks Procter & Gamble as a Top 25 stock, and Colgate as a top 40 stock. Both businesses have extremely low volatility and a long history of dividend increases which shows their strong competitive advantages. Colgate is growing significantly faster than Procter & Gamble, while Procter & Gamble has a much higher dividend yield than Colgate. Both businesses appear to be overvalued; Colgate more so than Procter & Gamble. Procter & Gamble has a P/E ratio of about 22, versus 30 for Colgate. Both businesses are holds at this time due to their strong competitive advantages.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.