By Mark Bern, CPA CFA
Colgate-Palmolive (CL) has increased its dividend for 48 consecutive years. The current stock price is $93.33 with a dividend of $2.32 for a yield of 2.5%. The dividend has increased at an annual compound rate of 12.7% over the past five years. Earnings per share have increased by a compound annual rate of 11.6% over the past five years. Those are good trends to have maintained during the economic environment we've been in during that period. That five-year period starts with 2006, before the great recession and ends with 2011, during a period of nagging elevated unemployment and slow domestic economic growth. Some consumers are shifting purchases from branded products to generics out of economic necessity. To say that CL has done well under these conditions is an understatement. The company is a well-managed, quality company that deserves consideration by long-term, dividend-oriented investors.
Colgate derives more of its revenue from outside the U.S. than most other household products companies; 75% of sales from overseas. Compare that with 45% for Procter & Gamble (PG). Colgate is particularly well-positioned in Latin America, where a large number of consumers are just learning the importance of good oral care. The long-term potential in Latin America alone is greater than the North American market due to a larger population, a faster growing population, improving standards of living, and hygiene educational programs to drive increased uses of dental products, soaps, and detergents. It is the Latin American potential that interests me the most for Colgate. Competitors are not ignoring the region, but Colgate has a lead here and is better established with distribution and marketing.
Let's take a look at how Colgate grades out on the report card.
Ratio / Measure
Pass / Fail
Ave. Annual 5-Yr Earnings Growth
Net Profit Margin
Debt to Total Capital
Return on Total Capital
The company failed in two areas: P/E relative to the industry should be at a premium, but an 18% premium seems a bit high. I would prefer it to be at a 10%-12% premium. The stock is not wildly overpriced, but it's not a bargain here, either. The debt-to-total-capital ratio is less worrisome to me. The company has managed its debt load at or near this level for a long time without problems and retains an AA- rating from Standard & Poor's.
I expect the company to grow earnings at a compound annual rate of about 8.5% with dividend increases at a similar rate. Total return over the next five years should average about 11%. This is a company that deserves consideration for long-term, dividend/growth investors. The patient investor should be able to pick up shares slightly below $90 in a shallow correction.
My goal is not to try to time the market or pick the top or bottom for any individual stock. Rather, I hope to separate the wheat from the chaff, so to speak. I try to bring the best two or three companies in each industry to investor attention. None of us knows with certainty when the market will correct or head higher or by how much. I also hope that all investors will complete additional due diligence on each stock considered before adding purchases to their portfolio to ensure that each holding is appropriate and suitable to each individual's needs.