Every now and then, financial media publish best of ideas, best of the best stocks etc. For a serious investor who is investing her/his majority of wealth in a portfolio, one stock idea is definitely sounding ridiculous and uncalled for. However, for young and new investors who are just getting wet in this gigantic swirling pond, trying your analytical skills in one or few stocks is not a bad idea (provided this is your play money that pays your tuition in stock investing).
In the above spirit, we would like to present Colgate-Palmolive (NYSE:CL), that produces and sells household products such as Colgate Total dental care (toothpaste and toothbrushes etc.), personal care, home care and pet nutrition. Colgate's products are with us daily. Less well known, however, is its stock that has delivered stunning returns for its shareholders in the past 34 years (from 1977 to 2011):
(Click charts to enlarge)
In the past 34 years, If an investor had put $10,000 in Colgate stock in 1977, it would have returned $3,475,195, compared with $122,563 in S&P 500 (NYSEARCA:SPY) stock index (dividend not counted). Simply put, it sported over 18% annualized return.
Let's take a look at some of its key financial ratios:
|Tax Rate %||35.00||32.39||30.41||33.09||32.25||32.57||31.56|
|Net Margin %||11.61||10.82||12.40||12.77||14.95||14.15||14.90|
|Asset Turnover (Average)||1.33||1.39||1.43||1.53||1.45||1.40||1.37|
|Return on Assets %||15.40||15.01||17.76||19.48||21.70||19.75||20.41|
|Financial Leverage (Average)||7.76||7.69||4.84||5.73||3.78||4.18||4.79|
|Return on Equity %||127.98||115.97||104.33||102.21||97.74||78.37||95.17|
|Return on Invested Capital %||28.80||28.18||32.67||35.17||39.32||36.03||37.00|
For more complete 10-year data, refer to morningstar.com.
Colgate has somewhat unbelievable high return on equity: trailing twelve month (TTM) 95%, from 78% low in 2010 to 475% high in 2002. This is compared with Procter & Gamble's (NYSE:PG) TTM 16% and around 20% in the last 10 years, or Pepsi Cola's (NYSE:PEP) TTM 29% and 30% in the last 10 years.
Perhaps a more realistic measure would be its return on assets: it had 20% TTM or 17% in the last 10 years, which is still much higher than PEP's 9% TTM or 14% or so in the last 10 years or PG's 7.34% TTM or about 10% in the last 10 years. Furthermore, higher asset turnover rate (around 1.3-1.4) also contributes to the high return on equity.
Finally, just for comparison, the following chart and table show how CL's stock is compared with PG and two diversified dividend paying ETF portfolios:
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Strategic Asset Allocation Risk Profile 0||1%||6%||24%||93%||1%||2%|
|Retirement Income ETFs Tactical Asset Allocation Risk Profile 0||2%||12%||15%||73%||9%||44%|
More detailed comparison.
To summarize, Colgate's management has been extremely skillful to enhance the two important metrics: asset turnover and return on asset that directly contributes to its astounding high return on equity. With strong brand names in oral care and personal care, the company has managed its business in a highly efficient and conservative manner. It is a stock that is worth looking into.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.