Colgate-Palmolive (CL, Financial) is one of the largest publicly traded personal products companies. The company has a market cap of $63 billion which is large for the personal products industry; larger than Kleenex maker Kimberly-Clark’s (KMB, Financial) $43 billion market cap, but significantly smaller than Procter & Gamble’s (PG, Financial) $244 billion market cap.
Colgate-Palmolive has an extremely long dividend history. The company has paid dividends for 119 consecutive years, and raised its dividend payments for 51 consecutive years. Despite its long-history of success, I was not impressed with the company’s 3rd quarter results last time I analyzed Colgate-Palmolive. See Colgate-Palmolive’s business operations and competitive advantage analyzed in part 49 of the 54 part Dividend Aristocrats In Focus series.
Business Overview
Colgate-Palmolive’s business operations are broken down into 2 primary segments: Oral, Personal, and Home Care; and Pet Nutrition. The Pet Nutrition segment has generated 13% of revenue and 13% of operating profit for Colgate-Palmolive through the first 9 months of fiscal 2014. The Pet Nutrition segment operates primarily under the Hill’s Pet Nutrition and Science Diet brand names.
The Oral, Personal, and Home Care segment is Colgate-Palmolive’s largest by far. The segment has generated 87% of the company’s sales and operating profits through the first 9 months of fiscal 2014. The segment sells well known consumer brand products including Colgate, Palmolive, SpeedStick, SoftSoap, Suavatel, and Ajax.
Colgate-Palmolive further divides its Oral, Personal, and Home Care segment into 5 geographic divisions. Each divisions percentage of the segment’s total revenue and operating profit is shown below to illustrate the global diversity of Colgate-Palmolive:
| Division | Segment Revenue % | Segment Operating Profit % |
| North America | 21% | 23% |
| Latin America | 31% | 31% |
| Europe/South Pacific | 23% | 22% |
| Asia | 17% | 18% |
| Africa/Eurasia | 8% | 6% |
Source: Colgate Third Quarter 2014 Press Release
Competitive Advantage
Colgate-Palmolive’s competitive advantage comes from its strong brands. The Colgate brand is the leading toothpaste and toothbrush brand based on global market share. Colgate-Palmolive has the following toothpaste market shares in various countires: 35.1% market share in the US, 49.6% in the U.K., 79.9% in Mexico, 71.5% in Brazil, 33.6% in China, and 54.7% in India. The image below shows how Colgate-Palmolive has managed to increase its toothpaste market share from 31% two decades ago to over 44% now.
Source: Barclay’s Back to School Conference Presentation
Colgate-Palmolive has managed its brands well. The company has grown its brand strength through product innovation and strong advertising spending. Colgate-Palmolive has spent over $250 million per year on research and development in each of its last three fiscal years. The company’s strong research and development spending has driven growth in both developed and developing markets as the company’s new products replace older products and attempt to gain share from competitors.
Colgate-Palmolive supports its brands with strong advertising spending. The company spend $1.89 billion on advertising in full fiscal 2014; 10.9% of total revenue. Colgate-Palmolive buys significant brand recognition and consumer attention with its massive advertising budget.
Colgate-Palmolive’s large size and global reach coupled with its research and development and massive advertising budget gives it lasting brand power. The company’s brands and size give it a strong competitive advantage that new entrants to the market cannot match.
Growth Prospects
Colgate-Palmolive delivered mediocre EPS growth of 4% and revenue growth of 3.5% in its most recent third quarter versus the same quarter a year ago. Despite recent weakness, the company has a solid history of growth. Colgate-Palmolive has grown EPS by about 7.8% a year over the last decade. Revenue per share has grown by 6.6% per year and dividends per share have grown by 10.9% per year over the same time period.
Going forward, I expect Colgate-Palmolive to deliver solid EPS growth of between 5.5% and 8.5% per year. EPS growth will be driven by organic growth of between 4% and 6% going forward. Colgate-Palmolive has reduced its net share count by about 1.5% per year over the last decade; I expect share count reductions to add about 1.5% of growth for shareholders. Colgate-Palmolive has a history of increasing its gross and operating margins through efficiency gains and price increases. I expect margin expansion to add between 0% and 1% to growth per year in the future. In total, shareholders of Colgate-Palmolive can expect EPS growth of between 6.5% and 8.5%.
Colgate-Palmolive’s organic growth will come emerging market growth and new product initiatives in developed markets. The company’s biggest growth drivers will be China and India. Indian per capita GDP is expected to double by 2020, with China expecting rapid growth as well. In addition, populations are expected to continue rising in both China and India. China and India are expected to lift 700 million people into the middle class by 2020. This rise in middle-class consumers bodes well for Colgate-Palmolive. Emerging market growth will fuel the company’s growth going forward.
Dividend Analysis & Total Shareholder Return
Colgate-Palmolive currently has a dividend yield of about 2.1% combined with a payout ratio of about 55% of expected full year 2014 EPS. Due to Colgate-Palmolive’s relatively high payout ratio, the company will likely grow its dividend payments in line with EPS growth going forward. Using the median of Colgate-Palmolive’s expected EPS growth rate of 7.5%, shareholders can expect the following yields on cost from Colgate-Palmolive:
- Yield on cost in 3 years of 2.6%
- Yield on cost in 5 years of 3.0%
- Yield on cost in 10 years of 4.3%
Colgate’s current dividend yield of 2.1% combined with its expected EPS growth rate of between 6.5% and 8.5% gives it a total shareholder return of between 8.6% and 10.6% going forward. This return excludes the impact of valuation multiple changes.
Valuation
As discussed above, Colgate-Palmolive will likely generate EPS growth in the mid to high single digits. The company’s solid brands give it limited downside risk from an operational perspective. Due to its solid growth prospects and limited operational risk, Colgate-Palmolive has traded at a premium of about 1.15x to the S&P 500’s P/E ratio over the last decade.
The S&P 500 is currently trading at a P/E ratio of about 19.25 expected full year 2014 EPS. Colgate-Palmolive is trading at a P/E ratio of about 26.75 expected full year 2014 EPS. This comes out to a premium of about 1.4x to the S&P 500’s P/E ratio. Colgate-Palmolive is trading well above its historical premium to the S&P 500 at this time. As a result, I believe the company is currently overvalued.
Recession Performance
Colgate-Palmolive’s branded consumer products did exceptionally well during the Great Recession of 2007 to 2009. The company managed to increase EPS and dividends per share each year throughout the Great Recession. The company’s success during economic weakness is attributed to its low-cost consumer goods coupled with strong brand name recognition. People still need toothpaste and cleaning supplies, even during times of economic hardship. Colgate-Palmolive’s EPS throughout the Great Recession are below to show how well the company performed through that difficult time:
- 2007 EPS of $1.69
- 2008 EPS of $1.83 (8.3% increase)
- 2009 EPS of $2.19 (19.7% increase)
Final Thoughts
Colgate-Palmolive is a fantastic business with a portfolio of high quality brands. The company has strong future growth potential in China, India, and other emerging markets. Despite the strength of its underlying business, Colgate-Palmolive appears overvalued. The company is rated as a hold using The 8 Rules of Dividend Investing. I believe Colgate-Palmolive makes a solid long-term investment, but new potential investors would likely do better to wait for a more attractive entry point.
