Why Income Investors Should Expect A Dividend Raise Soon From This Dividend King

Summary

• 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.

Business Overview

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 26^th, 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.

Growth Prospects

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.

Dividend Analysis

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%.

Final Thoughts

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.

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

Comments

[jimklawyer]

For those considering CL as a long-term investment I would suggest an analysis based on the potential drawdown, in other words how far might CL fall if the "phat were to hit the shin".

For an example, in lat August of 2016 to early 2017 CL fell from the mid-$70s to lows in the $63-$64 range in late January of 2017. So, about a 16% loss. Anyone who can't stand to lose 16% even in a relatively low volatility stock like CL shouldn't be investing in equities.

In mid-July of '14 to October of the same year, there was roughly an 11% pullback. In March of '93 through August of '93, there was a real decline in CL.

Maybe there will be another real bear market, as opposed to just these minor low double digit declines which we've been experiencing over the last 8 to 9 years. But, everyone's risk tolerance is different, and not to pick sides, but I turned off div. reinvesting for most of my taxable equity holdings, just so I won't get caught in the wash rule snare, since it was too hard to keep track of when the div was paid. That's just me; your preferences may be and likely are different.

[4paisa]

even at $71 price div yield is more like 2.25%. it is not an attractive entry point for dividend stock.

[By_Endurance_We_Conquer]

Sure Dividend aka Bob Ciura, well done!

Great analysis with the - again - usual spot on idea to where the dividend might go!

CL just declared a 5% increase!

[MyStockVault]

CL is a HOLD.

[Cash Flow Assets]

I am very excited for 2% raise

[5ofDiamonds]

Lets analyze CL (rounded metrics):

1. Stock price $69.(52 week range - 68 to 78), so towards 1 year low. Which means not much because 2017 was a crazy year. Personally, I think most stocks have lost their 1 year llow valuation, because 2017 was crazy. Also look at 5 year lows.

2. Historical charts tell me that the stock was a dud, but rose crazy in the last decade (under $5 to over $70 kimda story). The Q then becomes that for this, and all such stocks, that if the 80% of their rise has come in a short period of time after 2009, can it sustain? Believe it or not, a lot of stocks have had crazy growth in their stock price since 2014. Look at their charts.

3. Yahoo Finance says PEG ratio is 2.65 i.e. this company is not expected to grow too much in next 5 years. This is common for ALL dividend kings. They have reached a flat land. For CL, even P/E is high for whats projected for its growth. It must mean, market pays for its brand.

But I noticed that Yahoo Finance miscalculates PEG, esp. for companies which do not follow calendar year as their financial year.

4. Lets look at CL at Fidelity, for its PEG ratio. Fidelity says, that PEG ratio for CL is 3.69 (vs. Yahoo Finance's 2.65). Screw it, I got an idea. Let me look at their Earnings.

5. CL earned $2.87 for its stock price of $69 in 2017. It will earn $3.16 and then $3.43 in next 2 years, per estimates. Umm...not a good growth rate. That explains the high PEG ratio above 2. Its a good company but do not expect growth. You buy it, and you can feel stuck!

Conclusion: Not a buy.

Regards.

[Evil Enantiomer]

Not sure this occurred to you but “Sure DIVIDEND” isn’t so much interested in the stock’s growth as much as he likes the stock’s dividend growth... which has been increasing for a while.

[AlieGee]

"5. CL earned $2.87 for its stock price of $69 in 2017. It will earn $3.16 and then $3.43 in next 2 years, per estimates. Umm...not a good growth rate."

5 - These numbers can change along with Consumer Staples sentiment.

Was somewhat disappointed in the 5% dividend increase, though.

[5ofDiamonds]

Oh c'mon Evil Enan,

Dont get so lost in Dividends, and Dividend growth that you overlook a simple fact as to where it is coming from?

Anyone can issue debt, and increase dividends. Hear of Payout ratio? Some dividend contenders on David Fish CCC list earn $1 and pay out $2? How so?

Do not be so "sure" of dividends.

Regards.

[User 46598876]

I considered entering this stock recently but was scared off by the massive amounts of insider selling - thiughts?

[MolluskOS]

Tempted to increase my long standing position at the current depressed price point. Adding another 5% allocation in terms of shares held holds appeal at this weeks near 52 week low.

[5ofDiamonds]

Sure Dividend,

I think folks are better off going to a 20% cash position if they are not already.

Regards.

[geekette]

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Why? What is cash going to do for me that CL won't in 2018??

[5ofDiamonds]

Hi geekette,

Keeping 20% cash now is the ONLY BEST advise I have learnt since I started learning about markets on SA.

Regards.

[geekette]

but, why? what about this "advice" appeals to you for your own situation?

I understand that I march to a different drummer, not ever sitting on investable cash, but why dump 1/5 of my stocks? It took decades to build out and up to the level I'm at now, I am not interested in tearing down that wall because it must indeed be built again. I have never been a "sell now to buy back cheaper later" person.

Retirement is a different ballgame, I will carry more cash outside of portfolios than I do now since paycheck is gone, plus some modest cash in portfolios to draw on, neither will ever represent 1/5 of my assets, but current conditions, sitting 7 years pre-retirement, do not indicate to me that I need to pull out. In fact, since nobody knows when anything bad or good is going to happen in the market, 20% cash was bad advice in 2010, 2011, 2012, 2013... and I don't feel that it is somehow better advice today.

I understand that some people like to have money ready "for opportunities" but the market is open more days of the year than not, which is the opportunity I take advantage of. I do like dollar cost averaging, including my bastardized version of it, because it puts me into position to capture what the market is giving when it's giving it, and ups my ante for the next div pay. I guess I am more of a compounder than an opportunist?

It seems you are seeing this advice here on SA, in which case I would caution that this is not an advice site, we are all opinionated investors mostly each doing our own thing and learning from each other. I expect that you do know that but I want to make sure. You are a poster I'd not seen around here until recently so I figure my role as an old timer is to assist you in figuring out your journey. Definitely never telling you what to do, I do not give advice, I do not suggest people do what I do. I'm keen on people finding their own style that suits their goals. Nobody cares about your money more than you do.

So please tell me what 20% cash does For You, if you are sitting 20% cash or planning on getting to that. There is no right or wrong answer, I'm simply interested in how you have internalized the info and plan to integrate it into your own portfolio management.

What are you trying to achieve and how are you planning to achieve it? And if you don't mind, how far from retirement?

I hope you don't feel that I am picking on you because that is not at all my intent. I just wonder that if you do move to 20% cash, how long do you stay that way? What If the big correction is still 5 years away?

Tell me a bit about what you're doing, what ideas have you picked up that feel right to you, etc.?