- Colgate-Palmolive has increased its dividend for 55 years in a row. It is scheduled to raise its dividend in the next few days.
- Earnings growth has been light in recent quarters, due to higher raw materials costs. Fortunately, volume growth, price increases, and productivity gains are expected to offset rising cost inflation.
- Investors can reasonably expect a low-to-mid single digit raise for Colgate-Palmolive in 2018.
By Bob Ciura
Colgate-Palmolive (NYSE:CL) has a long history of rewarding shareholders with dividends. It has paid uninterrupted dividends since 1895, and it has increased its dividend payments for the past 55 consecutive years. It is a member of the Dividend Aristocrats, a group of 53 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. You can see all 53 Dividend Aristocrats here.
Not only is Colgate-Palmolive a Dividend Aristocrat. It is also a Dividend King, an even smaller group of companies with 50+ consecutive years of dividend increases. You can see all the Dividend Kings here.
There are just 23 Dividend Kings, including Colgate-Palmolive. The company has paid a flat dividend for four quarters in a row. It is scheduled to declare its next quarterly dividend soon, which means it is time for another dividend increase.
Colgate-Palmolive’s growth has slowed in recent quarters, which could limit the size of its dividend increase. But as a Dividend King, it is still highly likely another raise is in store for investors.
Colgate-Palmolive traces its roots all the way back to 1806. Today, the company manufactures oral care products like toothpaste, personal care products such as soap, home cleaning products, and pet food. Colgate-Palmolive is a global giant. It sells its products in over 200 countries and territories around the world, and the company generates $15 billion in annual sales. Its major brands include Colgate, Palmolive, Hill's Science Diet, and more.
Source: 2018 CAGNY Presentation, page 4
On January 26th, Colgate-Palmolive released its fourth-quarter earnings report. It was a challenging quarter for the company, as revenue missed analyst expectations by $40 million, while earnings-per-share was just in-line. Organic sales, which excludes non-recurring factors like currency exchange, rose 2% for the fourth quarter. This was below analyst expectations of 2.9% growth.
Pricing was also an issue for Colgate-Palmolive. Global unit volume increased 3%, but pricing fell 1% for the quarter. Earnings-per-share growth was more muted as well, in part because of higher cost inflation. Gross margin was 60.4% last quarter, compared with 60.8% a year ago. The consensus analyst estimate was for 61.0%. Higher raw materials and packaging costs weighed on margins, while SG&A expense rose 160 basis points for the quarter.
For 2018, Colgate-Palmolive expects net sales growth in the mid-single digits, with organic sales to be up in the low to mid-single digit range. The company expects organic sales growth to be driven by a mix of pricing gains and volume growth. To combat higher raw materials costs, Colgate-Palmolive is also launching a company-wide productivity initiative, to help reduce expenses. The company expects gross margin to rise 75 to 125 basis points in 2018 as a result, which will help Colgate-Palmolive continue to grow earnings and dividends.
One of Colgate-Palmolive’s most important growth catalysts is international growth, particularly in emerging markets like China, where Colgate-Palmolive has built a strong presence. Colgate-Palmolive has the #1 position in China, with market share above 30%. More than half of the company’s annual sales come from developing markets.
Emerging markets are extremely attractive for U.S. consumer products companies like Colgate-Palmolive. Emerging markets like China, India, and many others, have large populations, and are experiencing rapid economic growth.
Source: 2018 CAGNY Presentation, page 75
For example, last quarter, Colgate-Palmolive’s organic sales rose 1% in North America, while organic sales in Asia Pacific and Latin America increased 2.5%. Volume in India was up double-digits last quarter.
The emerging markets should provide a long-lasting growth tailwind for Colgate-Palmolive. By 2030, the global middle-class population is expected to explode, and most of the growth will be in the developing world. While the U.S. population is expected to remain relatively stable, populations are expected to rise significantly in Asia-Pacific, the Middle East, Central and South America, and Africa.
Another growth catalyst is price increases.
Source: 2018 CAGNY Presentation, page 60
Raising prices each year has historically been a major driver of Colgate-Palmolive’s revenue growth. As you can see in the above image, the company has had success in driving through price increases on an annual basis. The ability to raise prices each year indicates a strong brand.
Colgate-Palmolive currently pays a quarterly dividend rate of $0.40 per share, or $1.60 per share annualized. The current dividend yield is approximately 2.3%, which is slightly above the average dividend yield in the S&P 500. As previously mentioned, Colgate-Palmolive has been an excellent dividend growth company. It has increased its dividend each year, for more than five decades running.
Source: 2018 CAGNY Presentation, page 127
The current dividend payout is secure, with room for continued dividend growth. Colgate-Palmolive reported adjusted earnings-per-share of $2.87 in 2017. Based on this, Colgate-Palmolive had a dividend payout ratio of approximately 56%. This is a healthy dividend payout ratio, which leaves room for increases in 2018 and beyond.
One consideration is that Colgate-Palmolive’s dividend increases have slowed down in recent years. For example, the company’s dividend increases in the past two years were under 3%. These may have been disappointing increases, particularly for a low-yield stock. Given the company’s strong brand and top position in the emerging markets, a slight acceleration from previous dividend increases is possible, but investors should temper their expectations. Pricing is still a challenge for Colgate-Palmolive, and rising cost inflation is an added concern.
Given these potential headwinds, a dividend raise of 3% to 5% seems appropriate. This would put the new annual dividend payout in a range of roughly $1.64 to $1.68 per share. Based on this, the forward dividend yield would be 2.35% to 2.4%.
Colgate-Palmolive is a tried-and-true dividend growth stock. It does not have a high dividend yield at the moment, and its dividend growth is likely to remain subdued. But it does offer stability, and long-term growth potential. The company has a strong brand, which is atop the toothpaste and toothbrush product categories. It also has a growing animal health business. Plus, its core oral health products have a long runway of growth potential up ahead in the emerging markets.
Patient long-term investors should continue to stick with Colgate-Palmolive. It is a Dividend King, and it will almost certainly raise its dividend again in 2018. The dividend announcement is likely to come within a matter of days. Investors can expect another low-to-mid single digit dividend hike for this Dividend King.
Investors looking for high-quality dividend growth stocks should consider the Dividend Aristocrats like Colgate-Palmolive. The Dividend Aristocrats have significantly outperformed the S&P 500 Index in the last 10 years. Their outperformance is likely to continue moving forward, as the Dividend Aristocrats have strong brands and durable competitive advantages. This is why we created our service Undervalued Aristocrats, which provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.
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