Dividend Aristocrats

Colgate Palmolive Stock and 56 Years Dividend Growth

Colgate Palmolive is one of very few stocks that has consistently paid and raised dividends for 56 years. Colgate Palmolive Stock is member of the prestigious S&P 500 Dividend Aristocrats group. To be a dividend aristocrat, companies must have paid and raised dividends for at least 25 years, be part of the S&P 500 index and have at least $3 billion in market capitalization.

In this article, we will go over Colgate Palmolive’s business fundamentals, review latest financials and 2018 annual report, dividend growth history and compare valuation and performance to the S&P 500.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Colgate Palmolive is a consumer products company founded in 1806 that employs 34,500 people  and operates in over 200 countries. The company conducts business in 2 segments:

  1. Oral, Personal  and Home Care
    • Oral Care brands include Colgate Total, Colgate 360, Enamel Health, Colgate Sensitive.
    • Personal care brands such as Soft soap available in butter & cocoa, wild basil & lime, orchid & coconut milk, etc.
    • Irish Spring brand sells bar soaps and body washes.
    • Sanex skin moisturizer products are sold in the UK with speed stick anti-perspirants.
    • Home Care products include laundry detergents like Brite, Murphy Oil soap, Ajax dish soap, etc.
  2. Pet Nutrition
    • Marketed as “Hill’s” in 80 countries worldwide, this segment makes healthy food for dogs and cats under the Hill’s Science Diet and Hill’s Prescription Diet brands.

Attached is a screenshot from Colgate’s 2018 annual report showing global brands and percent of total sales.

Colgate Palmolive Stock trades on the New York Stock Exchange with ticker symbol CL. It has a market capitalization of $58.37 billion. The current dividend yield is 2.5%, which is 50 basis points higher than the yield provided by S&P 500.

For 2018 fiscal year, Colgate-Palmolive generated $15.54 billion in sales and earned net income of $2.4 billion, implying a profit margin of 15.5%.

The company’s sales are spread out evenly across North America, Latin America, Europe and Asia Pacific. For 2018, revenues in North America  equaled $3.348 billion, $3.605 billion in Latin America, $2.502 billion in Europe and $2.734 billion in Asia Pacific while $967 million in Africa. The Pet Nutrition business earned revenues of $2.388 billion.

Sales of Oral, Personal  and Home Care products made up 47%, 20% and 18% of the company’s total revenues in 2018. The remaining 15% of revenues came from Pet Nutrition business.

By investigating the financial statement summaries’ below, we learn that North America has an operating profit margin of 31%, Latin America has 27.6%, Europe has 25.3%, Asia Pacific has 28.4% while Africa has the lowest operating margin of 17.8%.

Revenue and Operating Profit by Geography Colgate

Growth Outlook

In its 2019 2nd quarter results released on July 26th, 2019, management announced organic sales growth stood at 4% driven by higher volume sales and higher pricing. Prices were raised through every operating division and geography.

Colgate’s President and CEO quotes, “As we look ahead, based on current spot rates, we continue to expect 2019 net sales to be flat to up low-single-digits, with organic sales up between 2% and 4%, though we now expect to be toward the higher end of that range as we continue to plan for increased investment behind our brands, higher pricing and strong innovation, particularly behind our core businesses.”

Organic sales grew 3% in North America, 7% in Latin America, 1% in Europe, 9.5% for Africa/Eurasia, and 6% for the Hill’s Pet Nutrition brand. Only Asia was the decliner in organic sales with a 1% decrease.

Colgate has a 41.4% market share around the world in the toothpaste market. In the space of manual toothbrushes, Colgate-Palmolive has a 31.7% market share year to date. What are the growth prospects for the company?

  • Colgate Total has a growing worldwide market share, up from 5.9% in January 2019 to 6.5% by July 2019.
  • Growth in Hill’s Science Diet for pets growing at 6% in 2nd quarter, 2019.
  • Pricing growth of 10% in Colgate Total products.

Colgate Worldwide Market Share

Performance of Colgate-Palmolive (CL) Stock

Below is a monthly chart of the Colgate-Palmolive Stock since 1982. The stock was trading at $1.06 as of January 1982. The price as of October 2019 is $68.03. The result is an astounding 6470% gain over a period of 37 years. The annualized compounding gain is a whopping 12%.

Long term chart of Colgate Palmolive Stock

Dividend History, Sustainability and Payout Ratio

Colgate Palmolive paid its first dividend in 1895 and has steadily increased its dividend every year for the past 56 years. This is a very impressive track record as Colgate-Palmolive belongs to the S&P 500 Dividend Aristocrats Index.

This index includes companies that are included in the S&P 500 Index, have a market capitalization of at least $3 billion and have consistently raised their dividends at least for the last 25 years, without missing a single one.

Colgate has increased its dividend from 6 cents in 1977 to $1.71 for 2019, a whopping 2850% growth in 42 years.

Colgate Palmolive Dividend Growth

Below is a chart showing Colgate’s dividend growth in % terms for year over year. During the great financial crisis, Colgate grew its dividend 10.26% in 2008, 18% in 2009, and almost 12% in 2010. However, since 2013, the rate of growth in dividends has slowed from double digits to mid single digits including the lowest growth of just 3% in 2015 and 2.66% in 2016.

As the company matures and its product lines become saturated in a very competitive category, we expect Colgate-Palmolive to grow its dividend at less than 5% each year for the next 5 years.

Colgate Palmolive Stock Dividend Growth History

Measuring the Dividend Payout Ratio

Colgate-Palmolive has paid dividends consistently and grown them each year for the last 56 years. How awesome is it to invest in a company whose products we use every single day, collect growing dividend checks as well as get rewarded for being patient by owning the stock. Colgate-Palmolive is one of the best blue chip stocks an investor can own for the long term due to its brand popularity, strong cash flows and strong management, as well as geographical diversification.

Lets examine the the dividend payout ratio for this company. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends. Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2018 annual report, Colgate in its Statement of Cash Flows  shows net cash from operations at $3.056 billion. Capital expenditures reduced this balance by $436 million. This means Colgate-Palmolive generated $2.62 billion in free cash flow for the 2018 fiscal year.

Colgate Cash from Operations

Colgate-Palmolive paid out a total of $1.591 billion in dividends in 2018. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $1.591 billion / $2.62 billion

Dividend Payout Ratio = 61%

A dividend payout ratio of 61% is sustainable and means the dividend will grow over time, as earnings and cash flows accelerate.

Colgate-Palmolive (CL) Stock Performance and Valuation

As of October 2019, Colgate-Palmolive (CL) stock is up 18.2% year to date, versus the S&P 500 which is up 19.85%. The S&P 500 trades at a forward price to earnings ratio (Forward P/E) of 16.9 times while Colgate-Palmolive (CL) trades at a forward p/e of 24.17.

How are we making this calculation? For the full year 2019, Colgate is expected to generate earnings per share of $2.83. The stock currently has a price of $68.34 as of the time of this writing. Therefore:

Forward Price to Earnings Ratio = Stock Price / Forward 12 Months Earnings per Share

Forward P/E = $68.34 / $2.83

Forward P/E = 24.14 times earnings

As a comparison, the S&P 500 Consumer Staples (XLP) Index trades at a forward price/earnings ratio of 19.6 times.

Why is Colgate-Palmolive Stock so Expensive?

Colgate stock has under performed the S&P 500 year to date. However, the stock trades at a more expensive valuation than the S&P 500 as well as the S&P 500 Consumer Staples (XLP) index.

The reason for this is, as the yield curve inverted in 2019 and fears of trade wars and recession in 2020 rise, investors flock to “safe stocks.” During a recession, people will not stop brushing their teeth, hence the demand for Colgate’s products will be steady.

Has Colgate-Palmolive (CL) Outperformed the S&P 500 over 10 Years?

Below is a 10 year chart comparing Colgate-Palmolive’s stock performance to that of the S&P 500 Index. Why the S&P 500? Because it is an index of America’s top blue chip stocks, many of them which pay dividends and grow them every year.

Colgate-Palmolive’s performance is in the red line while the S&P 500 is in blue. As of 24th, October 2019, Colgate-Palmolive has yielded a return of 120% since the last 10 years while the S&P 500 is up 178.3%. This is an under performance of 58.3%.

Why has Colgate not performed as well as the S&P 500? Reason is many years of no revenue growth and lack of sizable acquisitions which drive revenue and earnings growth.

We would not buy this stock at these price levels mainly due to elevated valuation, under performance and no organic revenue growth.

Colgate Palmolive Stock Performance

Executive Summary

Here is what we like and don’t like about Colgate-Palmolive stock.

Likes

  • Consistent dividend payments and growth for over 56 years.
  • A higher dividend yield of 2.5%, versus 1.9% paid by the S&P 500 index.
  • Growing dividends at 3.6% annually.
  • Dividend payout ratio of 61% leaving room for future dividend raises.
  • Growing worldwide market share of Colgate products including Colgate Total.

Dislikes

  • Very expensive valuation, at 24.1 times 2019 earnings.
  • Declining revenue growth rate over a 3 year average period.
Market Capitalization $58.37 billion
Dividend Yield 2.5%
Forward PE Ratio 24.14 times earnings
Dividend Growth (5 Year Avg.) 3.8%
Dividend Payout Ratio 61%
EPS Growth (5 Year Avg.) 3.6%
2018 Revenues $15.544 billion
Gross Margin 59.6%
Net Margin 15.5%

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