Recent failed acquisition attempt of Kraft Heinz (KHC, Financial) fueled speculations about possible M&A in personal care products. Meanwhile, the $65 billion Colgate-Palmolive (CL, Financial) toothpaste maker delivered its fourth-quarter and full-year 2016 results on late January.
Colgate-Palmolive reported a 5.2% decline in its sales for 2016 fiscal year, down to $15.2 billion from $16 billion in 2015. Despite the weak sales growth, the household and personal products delivered an outstanding 76.4% profit growth to $2.44 billion – compared to a three-year average of $2 billion.
As observed, marked profit growth was made possible secondary to absence of the $1.08 billion charge the company took in last year on its Venezuela operations. Operating profit would be flat excluding this charge in 2015.
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"In the face of continued challenging macroeconomic conditions worldwide, foreign currency headwinds accelerating versus expectations, slowing category growth in several key markets and India's demonetization, we achieved another quarter of organic sales growth. While net sales declined 4.5%, worldwide organic sales grew 1.5% led by emerging markets where organic sales grew 4.5%.
"Colgate's leadership of the global toothpaste market continued during the quarter with its global market share now at 44.0% year to date. Our global leadership in manual toothbrushes also continued with Colgate's global market share in that category now at 33.1% year to date.
"Pleasingly, gross profit margin, operating profit margin and net income as a percent to sales all increased versus the year ago period."Â –Â Ian Cook, chairman, president and CEO
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Shares of Colgate-Palmolive fell by 5.2% on heavy volume compared to the Standard & Poor's 500 index’s -0.09% change.
Valuations
Colgate-Palmolive trades at a premium compared to its peers. According to GuruFocus data, the toothpaste maker had a trailing price-earnings (P/E) ratio of 27 times (industry median 20) and price-sales (P/S) ratio of 4.4 times (industry median 1).
The P/B value multiple may not be a reliable valuation for Colgate-Palmolive as it had a book value of $17 million contrary to its market value of $65 billion – a 3,823 times multiple compared to its industry of 2.41 times, according to Reuters data.
Colgate-Palmolive also had a trailing dividend yield of 2.12% with a 100% payout ratio, 6.6% five-year growth rate and 1.10% share buyback ratio.
Total return
Colgate-Palmolive underperformed the broader S&P 500 index in both short and long term. According to Morningstar data, Colgate-Palmolive had one- and five-year total returns of 11% and 11.6%. In comparison, the broader index returned 26% and 14.1%. (10-K)
Colgate-Palmolive
Colgate-Palmolive was founded in 1806 – about 210 years ago – and is a leading consumer products company whose products are marketed in over 200 countries and territories throughout the world.
In 2015, Colgate-Palmolive derived 27% or $4.3 billion of its revenue, excluding its Pet Nutrition business, from Latin America followed by 20% from North America, 18% from Europe and South Pacific, 15% from Asia and 6% from Africa and Eurasia.
Colgate is a global leader in Oral Care with the leading toothpaste and manual toothbrush brands throughout many parts of the world according to market share data (1). The company is also a leader in many product categories of the Personal Care market with global leadership in liquid hand soap, which it sells under the Palmolive, Protex and Softsoap brands (2).
As mentioned earlier, Colgate-Palmolive had a 44% market share in the global toothpaste market as of December. The company also had a 33.1% market share in manual toothbrushes globally.
Colgate-Palmolive operates in two product segments: Oral, Personal and Home Care and Pet Nutrition. The company provided further revenue information regarding its Oral, Personal and Home Care business performance per country and their corresponding operating profitability.
(10-K and Press Release, Colgate-Palmolive)
Oral, Personal and Home Care business
In 2016, the Oral, Personal and Home Care business experienced a 6.4% decline in overall sales while having generated 85% or $12.9 billion in total Colgate-Palmolive sales. The group also delivered an operating margin of 29% compared to 28% in 2015.**
(**Operating profit margin excluded corporate-related deductions)
Oral, Personal and Home Care business sales and operating margin per country
North America:Â Sales grew 1% year on year on 2016 and delivered a 32% operating margin compared to 31% in 2015. The segment contributed 21% or $3.18 billion in total company sales.
Latin America: Sales dropped 16% while having delivered a 31% operating margin compared to 28% the year prior. The marked dropped was secondary to Colgate-Palmolive’s deconsolidation of its Venezuelan operations. Latin America contributed 24% – largest among different country segments – to total company sales.
Europe:Â Sales fell 3% and had a 25% operating margin compared to 26% in 2015. Colgate-Palmolive derived 15% of its sales from Europe.
Asia Pacific:Â Sales fell 5% and generated 32% operating margin compared to 30% in 2015. Asia Pacific sales contributed 18% to total company sales.
Africa/Eurasia:Â Sales fell 5% and had a 19% operating margin versus 18% in 2015. Sales in the segment contributed 18% to total company sales.
Pet Nutrition
The Pet Nutrition business contributed the remaining 15% or $2.26 billion compared to $2.21 billion in 2015. The segment had 29% operating margin compared to 28% in 2015.
Including its fiscal 2016 operations, Colgate-Palmolive exhibited three-year sales and profit growth (or losses) and margin averages of -4%, 12%, and 12%.
Cash, debt and book value
As of December, Colgate-Palmolive had $1.32 billion in cash with $6.53 billion in debt with total equity of $17 million – 384 times. In contrary, the household products maker had negative 44 million in total equity in 2015.
Goodwill and intangibles, excluding marketable securities, were 32% of its $12.12 billion assets. The company had a book value of $17 million compared to negative $44 million in 2015.
Cash flow
(Release, Colgate-Palmolive)
For 2016, Colgate-Palmolive grew its cash flow from operations by 6.5% to $3.14 billion. Growth on cash flow recognized came from the marked profit growth the company had in recent year operations.
The company allocated $336 million in marketable securities and investment purchases and had $378 million in proceeds received from such investments.
(Company Filings, Colgate-Palmolive)
Capital expenditures were $593 million leaving Colgate-Palmolive with $2.55 billion in free cash flow compared to $2.26 billion in 2015. The company allocated 112% of its free cash flow in dividends and share buybacks. On average, Colgate-Palmolive allocated 121% of its free cash flow in shareholder payouts in the past three fiscal years. Also, Colgate-Palmolive pulled in $164 million in debt proceed, net repayments, in 2015.
Conclusion
Colgate-Palmolive has been reliable as growing its dividend payouts over time. The household giant is included in the list of S&P 500 Dividend Aristocrats – known for including S&P 500 companies that have increased dividends every year for the last 25 consecutive years.
Together with above free cash flow payout levels and consistent declining sales in recent years could easily deter any conservative investors. Colgate-Palmolive also did not feature an attractive book value multiple in its current valuation.
(Colgate-Palmolive Share Price and P/S ratio, GuruFocus)
Despite the weakness in sales, analysts at Exane BNP Paribas raised their outlook on Colgate-Palmolive shares to outperform from neutral. Stifel, meanwhile, reiterated its hold recommendation and lowered its share price target to $70 a share from $75.
The company had an average share price target of $72.63 a share among the 16 analysts that cover the stock.
In comparison to its current share price, Colgate-Palmolive is unappealing and therefore a hold.
Notes
- 10-K Filing: Colgate’s Oral Care products include Colgate Total, Colgate Sensitive Pro-Relief, Colgate Max Fresh, Colgate Maximum Cavity Protection with Sugar Acid Neutralizer, Colgate Optic White and Colgate Luminous White toothpaste, Colgate 360° and Colgate Slim Soft manual toothbrushes and Colgate Optic White, Colgate Total and Colgate Plax mouthwashes. Colgate’s Oral Care business also includes pharmaceutical products for dentists and other oral health professionals.
- 10-K Filing: Colgate’s Personal Care products also include Palmolive, Sanex, and Softsoap brand shower gels, Palmolive, Irish Spring and Protex bar soaps and Speed Stick, Lady Speed Stick and Sanex deodorants and antiperspirants. Colgate is the market leader in liquid hand soap in the U.S. with its line of Softsoap brand products according to market share data. Colgate’s Personal Care business outside the U.S. also includes Palmolive and Caprice shampoos and conditioners.
Colgate manufactures and markets a wide array of products for the Home Care market, including Palmolive and Ajax dishwashing liquids, Fabuloso and Ajax household cleaners and Murphy’s Oil Soap. Colgate is a market leader in fabric softeners with leading brands including Suavitel in Latin America, Soupline in Europe and Cuddly in the South Pacific according to market share data.
Disclosure: I do not have shares in any of the companies mentioned.
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