(Published March 9 by Bob Ciura)
Consumer products companies have been among the most rewarding dividend stocks to own over long periods of time.
Take industry behemoths Procter & Gamble (PG, Financial) and Colgate-Palmolive (CL, Financial) as prime examples.
Procter & Gamble has paid a dividend for 127 years and has increased its dividend for 60 years in a row.
Colgate-Palmolive began paying dividends to shareholders in 1895. It has increased its dividend for 54 consecutive years.
Both companies are on the list of Dividend Aristocrats, a group of companies in the Standard & Poor's 500 that have raised dividends for 25-plus years.
You can see the entire list of Dividend Aristocrats here.
Not only that, but they are also members of the Dividend Kings, an even more exclusive group of companies with 50-plus years of consecutive dividend increases.
There are just 19 Dividend Kings. You can see the entire list of Dividend Kings here.
Business overview
Winner: Procter & Gamble
Procter & Gamble and Colgate-Palmolive are both giant consumer products companies.
Procter & Gamble operates more than 60 brands, spread across 10 product categories.
Source: Company Fact Sheet, page 2
After a long divestment process, Procter & Gamble has repositioned itself. In 2014, Procter & Gamble sold its Duracell battery business to Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) for $4.7 billion.
The following year it sold a portfolio of 43 beauty brands to Coty (COTY, Financial) for $12.5 billion.
Colgate-Palmolive also has a large product portfolio, but it is more focused. Most of the company’s operations center on three key areas – oral health, household cleaners and animal health products.
Some of its core brands include Colgate, Palmolive, Softsoap, Irish Spring, Tom’s of Maine, Ajax and Hill’s.
Colgate-Palmolive has a strong grip on oral health products. It claims massive share in global toothpaste sales.
Source: 2017 CAGNY Presentation, page 23
But Procter & Gamble has a big structural advantage right now –Â its smaller international presence.
Procter & Gamble generates roughly 44% of its sales from North America.
By contrast, Colgate-Palmolive generates just 21% of its sales from North America. As such, it is much more exposed to the strong U.S. dollar than Procter & Gamble.
The strong dollar has had a severe impact on revenue growth for companies with large overseas businesses, and Colgate-Palmolive has been one of the hardest hit in the consumer goods sector.
Source: 2017 CAGNY Presentation, page 13
For example, Colgate-Palmolive’s net sales fell 4.5% last quarter while Procter & Gamble posted flat sales in its most recent quarter.
Another reason Procter & Gamble’s business model is stronger right now is its asset sales.
The company has shed dozens of low-growth brands and has reaped massive productivity improvements as a result.
Source: 2017 CAGNY Presentation, page 13
Over the past five years, Procter & Gamble generated $10 billion of cost savings, and it believes there is potential for another $10 billion in cost cuts over the next five years.
These sharp cost reductions have had a significant impact on Procter & Gamble’s margins.
In fiscal 2016, operating margin based on continuing operations expanded by 370 basis points
Thanks to its massive portfolio transformation, Procter & Gamble is a much slimmer, more streamlined company.
This has led to stronger earnings growth in recent periods. Cost cuts and gains from divestments helped Procter & Gamble’s diluted earnings per share increase 51% in 2016.
Growth prospects
Winner: Colgate-Palmolive
Colgate-Palmolive’s huge international footprint is a disadvantage right now but will likely be a benefit over the long term.
Thanks to Procter & Gamble’s portfolio restructuring and its lower level of currency risk, it has posted much better growth rates over the past year.
Source: 2017 CAGNY Presentation, page 3
It is important to remember that currency movements can be cyclical. Volatile swings in the dollar usually revert to the mean over the long term.
Colgate-Palmolive’s huge international footprint is a disadvantage right now but will likely be a benefit over the long term.
In 2016, Colgate-Palmolive’s organic revenue (excluding foreign exchange) increased 5% in the international markets, led by 10% growth in Latin America, 5.5% in Africa and 2% in Asia.
These growth rates solidly exceeded North America, which grew organic revenue by 1.5% for the year.
Colgate-Palmolive’s lead in China and India should be a long-term tailwind for multiple reasons.
First, emerging markets are more receptive to price hikes.
This is a key growth lever for Colgate-Palmolive. Price increases boosted its revenue by 2.5% last year. Procter & Gamble’s pricing was flat in the past two quarters combined.
Going forward, China and India are extremely appealing for growth because they have populations of 1 billion and expanding middle classes.
Not only that, but there is huge growth potential in Colgate-Palmolive’s core toothpaste business. Toothpaste consumption is low in many parts of the world including China and India.
Source: 2017 CAGNY Presentation, page 45
Procter & Gamble’s huge cost-cutting and share repurchases caused a large windfall last year, and it has been shielded from the effects of the strong dollar.
But it has less exposure to high-growth emerging markets than Colgate-Palmolive. As a result, Colgate-Palmolive could generate stronger long-term growth.
Dividends
Winner: Procter & Gamble
Both stocks are similarly valued. On a forward basis, Procter & Gamble and Colgate-Palmolive trade for price-earnings (P/E) ratios of 21 and 23.
Each stock appears to be fairly valued so there is not much difference in terms of valuation, but they do differ in terms of dividends: Colgate-Palmolive has a current yield of 2.1%. This is only an average yield.
The S&P 500 Index on average yields about 2%.
Meanwhile, Procter & Gamble stock has a 3% dividend yield. It provides about 43% more dividend income than buying Colgate-Palmolive stock right now.
It could be possible for Colgate-Palmolive to catch up over time if it maintains a significantly higher dividend growth rate than Procter & Gamble.
But this is not likely. Their dividend growth is similar.
Over the past five years, Procter & Gamble and Colgate-Palmolive have increased their dividends by 4% and 5%.
As a result, Procter & Gamble is a clear winner in dividends. This gives Procter & Gamble a significant advantage since dividends are a big reason to consider buying these stocks.
Final thoughts
Both Procter & Gamble and Colgate-Palmolive have long histories of paying dividends and raising their dividend payouts each year.
As a result, they are both worthwhile stocks for a dividend growth portfolio, but this may not be a great time to buy Colgate-Palmolive. It trades for a higher valuation than Procter & Gamble, with a much lower dividend yield as well.
As a result, Procter & Gamble looks to be the better dividend stock to buy right now. Procter & Gamble outranks Colgate-Palmolive using The 8 Rules of Dividend Investing for the reasons discussed in this article.
Disclosure: I am not long any of the stocks mentioned in this article.
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