This is the fifteenth in a series of articles that will take a look at the dividend Kings, companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 26%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Colgate-Palmolive Co. (NYSE:CL) and why it's a fair total return investment and good dividend growth company that has increased its dividend for 53 years making it a dividend King. The company has in the last 43.2 months had a above average total return and has a average yearly dividend at 2.1%. Colgate-Palmolive Company is a consumer products company, whose products are marketed in over 200 countries and territories throughout the world. Colgate-Palmolive Co. is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Colgate-Palmolive Co. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Colgate-Palmolive Co. passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review" These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, dividend growth, and growing companies that keeps me ahead of the Dow average.
Colgate-Palmolive Co. is a large-cap company with a capitalization of $66.8 billion. The size of Colgate-Palmolive Co. cash flow at $2.92 Billion from its consumer products business, allows it to pay its average dividend and have cash to add new products each year for business growth. I most times like to invest in the largest company in a sector because it got there by being better than the others. Proctor and Gamble (NYSE:PG) is by far the largest company in this sector at capitalization of $232 Billion. Looking at Proctor and Gamble from a previous dividend King article PG underperformed the DOW total return by 5% and have a lower dividend growth rate than CL, so CL is a better choice using these fundamentals compared to PG.
Colgate-Palmolive Co. has a dividend yield of 2.1% which is average for the market. The dividend has been increased for 53 years and its dividend is safe. The payout ratio average over the last 5 years is 51% which leaves plenty of cash to pay its dividend, maintain the company's business growth and buy back it's shares. Colgate-Palmolive Co. is therefore a fair choice for the dividend income investor, since the dividend is average, but the total return is above the DOW baseline making CL a good total return growth investment.
Colgate-Palmolive Co. yearly cash flow is good at $2.92 Billion and leaves plenty of cash after paying its average dividend for maintaining and growing its business. This good cash flow also allows the company to have cash available for buying small bolt on companies and developing new products.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Colgate-Palmolive Co. has a 3 year forward CAGR of 9% (from S&P Capital IQ) well above my requirement. Looking back five years $10,000 invested five years ago would now be worth $19,800 today (from S&P Capital IQ). This makes Colgate-Palmolive Co. a good choice for the total return investor. For Colgate-Palmolive Co. S&P Capital IQ has a three star rating or hold with a target price of $73 with present price being fairly priced at this target. In the long term Colgate-Palmolive Co. average dividend and its growing business in the consumer products business is a good choice for the total return investor with its above average total return. The PE is a bit high at 24 but almost all the consumer product companies have high PE's in this range. If you want a safe defensive business company, you have to pay the price.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Colgate-Palmolive Co. had better total return than the Dow baseline in my 43.2 month test period. I chose the 43.2 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance to see how the company does in good and bad markets.
This above average total return of 48.64% for Colgate-Palmolive Co. compared to the DOW baseline of 41.52% makes Colgate-Palmolive Co. a good investment for the total return investor. Colgate-Palmolive Co. has done better than the economy over the test period and has a dividend growth rate of 10.45% over the past 10 years. Year to date total return is 12.25% about 6% ahead of the DOW gain so far this year. The dividend is average at 2.1% and has been increased for 53 years making the company a dividend King. I added a guideline for total return mainly when I am looking at a high yield company as a test to see if the yield and price change really does beat the market. For Colgate-Palmolive Co. it shows that it is a great steady company having a beat over the DOW by 7% for my test period.
DOW's 43.2 month total return baseline is 41.52%
43.2 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Last Quarter's Earnings
For the last quarter Colgate-Palmolive Co. reported earnings on July 28, 2016 that slightly beat expected earnings at $0.70 compared to last year at $0.70 and expected at $0.69. Revenue was a miss by $10 Million and total revenue decreased by 5.4% year over year to $3.85 Billion. This was a good report showing the decreased revenue but still beating the earnings goal. This leaves plenty of cash remaining after paying the $0.39 dividend for business expansion. Earnings for the next quarter will be released in late October and is expected to be at $0.73/share compared to last year at $0.72/share, showing continued slow growth going forward.
Company Business Overview
Colgate-Palmolive Company is a consumer products company, whose products are marketed in over 200 countries and territories throughout the world. The Company's segments include Oral, Personal and Home Care, and Pet Nutrition. The Company sells its personal care products under the Palmolive, Protex and Softsoap brands. The graphic below shows some of the breadth of products that Colgate-Palmolive Company sells worldwide.
Since Colgate-Palmolive Company does business in 200 countries the strong dollar is a drag by 5.5% on revenues and earnings but Colgate-Palmolive Company has overcome this by having organic growth of 4.5% and adding new products to continues its growth.
Takeaways and Recent Portfolio Changes
Colgate-Palmolive Co. is a good choice for the dividend growth investor increasing its dividend for 53 years but with a average dividend yield of 2.1%. Colgate-Palmolive Co. beat the total return compared to the Dow average and is a good choice for the total return growth investor. The business is growing at 9% CAGR ( 3year forward estimate) and Colgate-Palmolive Co. is in the consumer products business sector which does alright even in this slow 2% economy. If you don't already have a position in the consumer products business sector Colgate-Palmolive Co. should be worth a position for your total return segment of your portfolio. Colgate-Palmolive Co. is one company I am pleased with as a solid long term company but will not be bought for The Good Business Portfolio because the portfolio does not have on open slot right now. I limit the portfolio to 25 companies because I cannot keep track of more than that. The Portfolio has a few companies that I intend to trim and sell over the next year and this will open the portfolio to some of the dividend kings that have been evaluated by this study.
Sold some CAB covered calls, sold August $55's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double. On August 1, 2016 I bought to cover (BTC) the calls I sold for a $1.50/share gain. Now if CAB goes up I can sell the calls in the same month for a double.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double. The HOG price is presently above the strike price and I will move the calls up and out if this is true at close to expiration date.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the four top positions in The Good Business Portfolio. Johnson and Johnson (NYSE:JNJ) is 8.7% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.7% of the portfolio, Home Depot (NYSE:HD) is 8.0% of portfolio, Boeing (NYSE:BA) is 7.8% of the Portfolio, therefore JNJ and HD are now in trim position with Boeing and Altria getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash flow on the 787 program in the third quarter of possibly $100 Million.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on AA,CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, MO, HOG, OHI, EOS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.