Dividend Investors' Guide - Part IX: There Is Something Appealing About Toiletries And Cosmetics

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 |  Includes: AVP, EL, HELE, IPAR, NUS, RDEN, RGS, SBH
by: Mark Bern, CFA

Back to Part VIII

By Mark Bern, CPA CFA

Toiletries and Cosmetics are closely related to household products and, indeed, there are several overlaps between the two industries. Therefore, I thought it would be appropriate to provide my analysis of the two in sequence to allay any questions of why my favorites in one industry were not included in my article about the other. I have two companies that made the list from toiletries and cosmetics and both fared very well against my metrics. If you are new to this series, please consider reading my fist article in the series titled "The Dividend Investors' Guide To Successful Investing." There you will find the detailed explanation of what the metrics mean and why I chose to use them to create my master list of dividend paying stocks.

The first company I like in this group is Inter Parfums (NASDAQ:IPAR). The company manufactures, markets and distributes perfumes, cosmetics and health and beauty aids in approximately 120 countries around the globe. There are several things to like about IPAR, not least of which is the rate at which the company has been growing both EPS and dividends over the past five years, at average compounded rates of 22.6 percent and 43.0 percent per year, respectively. The recent success of the company has been due to new product launches and extremely strong results from Asia. Once again, millions of people who, for the first time in their lives, are able to purchase and try things that were not attainable before are providing growth opportunities for well positioned companies like IPAR.

IPAR's exposure to the sluggish European economy is minimal as its diversified geographic operations mitigate weakness in any one given region. The company has plans to launch several new products in 2013 with potential to boost growth. Let's look at the report card.

Metric

IPAR

Industry Average

Grade

Dividend Yield

2.1%

1.9%

Pass

Debt-to-Capital Ratio

0.0%

34.3%

Pass

Payout Ratio

29.0%

27.0%

Neutral

5-Yr Average Annual Dividend Increase

43.0%

N/A

Pass

Free Cash Flow

$0.73

N/A

Pass

Net Profit Margin

5.3%

5.8%

Neutral

5-Yr Average Annual Growth in EPS

22.6%

4.1%

Pass

Return on Total Capital

12.8%

18.0%

Fail

5-Yr Average Annual Growth in Revenue

24.4%

6.0%

Pass

S&P Credit Rating

N/R

N/A

Neutral

Click to enlarge

IPAR has one fail (return on total capital) and three neutral ratings against six passes. One neutral ranking is due to S&P not rating the company for some reason. Perhaps the reason is that the company has no debt to rate. While I do not expect growth rates over the next five years to be as lofty as we have seen over the last five, I do expect low double digit average growth for both EPS and dividends. I expect the share price to follow suit with a five-year target price of $28.

The next company on my list actually ranks higher in some ways and for many of the same reasons. Nu Skin Enterprises (NYSE:NUS) sells personal care and nutritional products in more than 50 countries and derives about 86 percent of sales from outside the Americas. Europe accounts for only 9 percent of sales. Northern Asia, China and Southern Asia/Pacific regions account for about 77 percent of sales. The company distributes its products primarily through a network marketing system, an advantage in emerging markets where millions of people are eager to start their own business and build their fortunes on persistent, hard work. A look at how the company fares against the metrics tells us a story of successful execution by management.

Metric

NUS

Industry Average

Grade

Dividend Yield

1.8%

1.9%

Neutral

Debt-to-Capital Ratio

13.0%

34.3%

Pass

Payout Ratio

27.0%

27.0%

Pass

5-Yr Average Annual Dividend Increase

8.1%

N/A

Pass

Free Cash Flow

$1.02

N/A

Pass

Net Profit Margin

8.8%

5.8%

Pass

5-Yr Average Annual Growth in EPS

25.6%

4.1%

Pass

Return on Total Capital

22.8%

18.0%

Pass

5-Yr Average Annual Growth in Revenue

10.6%

6.0%

Pass

S&P Credit Rating

N/R

N/A

Neutral

Click to enlarge

The company has only two neutral ratings and eight passes. One neutral is for a dividend yield that falls 0.1 percent below the industry average and the other is for not having a credit rating on file at S&P. Again, the debt-to-capital ratio is only 13 percent and the company has adequate free cash flow so I am not concerned about the lack of a rating. One other trend that I like about NUS is that the profit margin is increasing. Management appears to remain vigilant in its efforts to control costs even while expanding its product line and entering new markets. That is an impressive balancing act. I expect EPS to grow in the 12 percent range while dividends grow at about 9 percent per year over the next five years. Neither EPS nor dividends skipped a beat during the great recession as both continued to climb against the headwinds created by the world economies.

Now for the other companies in the industry and why none are on my list. Even though Avon (NYSE:AVP) pays a hefty 4.4 percent dividend, EPS have yet to recover from the economic malaise that was kindled by the financial sector. Each year the bottom line results are worse than the year before and I believe that 2012 will be worse once again. I would stay away from this laggard. Helen of Troy (NASDAQ:HELE) may be a good candidate for a growth portfolio, but since the company does not offer a dividend I do not follow it. Sally Beauty (NYSE:SBH) and Elizabeth Arden (NASDAQ:RDEN) are eliminated for the same reason; no dividends. Estee Lauder (NYSE:EL) and Regis Corporation (NYSE:RGS) have not proven consistent enough in the area of increasing dividends. Each company tends to keep dividends flat for several years at a time before hiking the rate. Also, both pay dividend yield well below the industry average and below the average for the S&P 500. Better quality return can be found elsewhere, in my opinion.

And that concludes my assessment and master list entrants from the toiletries and cosmetics industry. Thanks for reading and, as always I enjoy your comments so keep them coming. Only through sharing our ideas, experiences and perspectives can we all learn to be better investors together. I wish you all a successful investing future!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.