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Robert Abbott
Robert Abbott
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Colgate-Palmolive: Waiting for a Dip

One of the world's oldest companies keeps finding new ways to keep growing

September 14, 2020 | About:

Colgate-Palmolive (NYSE:CL) is an old dog keeps learning new tricks. The Colgate-Palmolive Company has a three-pronged strategy for driving new growth:

  • Premium innovation in its core businesses,
  • Opportunities in adjacent categories,
  • Expanding in channels and markets that are growing quickly.

On the innovation in its core business, President and CEO Noel Wallace explained in the 2019 annual report that several of its flagship products had been reformulated. For example:

  • It 'reinvigorated' its Hill's Science Diet for pets with upgraded recipes, 'improved' kibble shapes and redesigned packaging.
  • In India, its anti-cavity toothpaste was reformulated with amino power, and during 2019 it was being rolled out across the rest of Asia.
  • A new whitening toothpaste was launched with 3% hydrogen peroxide, which the company considers its 'best whitening toothpaste ever.'

Turning to adjacent categories, it introduced Colgate Natural Extracts Charcoal toothpaste, the Colgate Bamboo manual toothbrush and Palmolive Pure & Delight vegan shower gels and liquid hand soaps.

As one would expect when expanding channels and markets, growing online sales is a priority, but the company is finding profitable niches elsewhere. For example:

"One of the biggest opportunities we have is in the pharmacy channel. Two highly therapeutic, specialized oral care brands that do very well in the European pharmacy channel, elmex and meridol, are being selectively expanded to countries like China, Turkey and Brazil, where pharmacy is one of the fastest-growing retail environments."

That's not bad for a company founded in 1806, making it 214 years old.

The company operates in two segments: "Oral, Personal and Home Care" and "Pet Nutrition." Colgate-Palmolive is a global company, one which provides investors with worldwide exposure in a single domestic stock:

Colgate-Palmolive regional sales

Let's now review the company's fundamentals to determine how well it has delivered for the shareholders.

Financial strength

CL financial strength

The first five lines on the GuruFocus financial strength table refer to corporate debt and how well Colgate-Palmolive is managing it in the context of the industry and its own history. Since we see a lot of orange and red, it suggests the company has too much debt now.

However, the interest coverage ratio, at more than 27, tells us this profit-generating company can cover its interest expenses 27 times over. The Piostroski F-Score and the Altman Z-Score are both strong, confirming that Colgate-Palmolive does not have a serious debt problem.

The biggest clue that its financial state is stronger than it appears is the lopsided difference between WACC (3.99%), or the weighted average cost of capital, and ROIC (27.26%), or the return on invested capital. The rate at which management earns income on its funds is almost seven times greater than the cost.

Profitability

Colgate-Palmolive profitability

The first two lines of the GuruFocus profitability table tell us why the company is so profitable—it has good margins:

Colgate-Palmolive margins

Based on both margins usually being at or above the 15% level, it would be safe to assume Colgate-Palmolive has a wide moat or competitive advantage.

The bottom three lines are less attractive. The revenue growth rate over the past three years has been anemic, while Ebitda has been negative and earnings per share have barely ticked up.

Valuation

Colgate-Palmolive valuation

If you had owned Colgate-Palmolive during the first eight years of the past decade, you would likely be pleased with the capital gains you scored. However, over the past couple of years you had to look on as the stock price essentially plateaued:

Colgate-Palmolive 10 year price chart

However, it soon may be moving toward new highs, according to the low valuation. The price-earnings ratio of 25.68 is high when compared with its competitors and peers in the Consumer Packaged Goods industry, and roughly on par with its own 10-year median.

The PEG ratio is quite high at 8.83 and that can be explained by observing that Colgate-Palmolive's Ebitda growth rate has been slow at 2.9% per year on average over the past five years.

We will skip the discounted cash flow (DCF) calculator on this company because the analysis would be based on a predictability rating of just 1 out of 5, making the projection fairly useless.

Dividend and share buybacks

Colgate-Palmolive dividend buyback

First, let's note that Colgate-Palmolive has a distinguished dividend history. It began paying dividends in 1985, 125 years ago, and has paid a dividend every year since then. In addition, it has increased its dividend every year for the past 57 years, giving it the status of a Dividend King (one of just 29 stocks that has increased its dividend every year for at least 50 years).

The current yield, at 2.27%, is comparable with that of the industry, but below its previous high. That high reached 2.81% when the price dipped earlier this year:

Colgate-Palmolive price and dividend yield

Its dividend payout ratio is reasonable at 58% and leaves lots of free cash flow for growth investments.

The three-year dividend growth rate is hardly an investor's dream at 3.3%, but at least the company has managed to keep the increases coming and avoided the loss of the Dividend King designation.

The forward dividend yield is just two basis points higher than the trailing 12-months (TTM) yield and reflects a 1-cent increase from $0.43 to $0.44 in the first quarter.

The five-year yield-on-cost is low at 2.72%, which is just half a point above the current rate. That's because of the low base (the current rate) and the low growth rate.

Shareholders could get an extra shot from share buybacks, with the three-year buyback ratio at 1.1. While the company has bought back a limited number of shares, it has reduced the count by almost 16% over the past decade:

Colgate-Palmolive shares outstanding chart

Gurus

The investment gurus followed by GuruFocus were net buyers of Colgate-Palmolive stock in the fourth quarter of 2019 and the first quarter of this year. However, the tide turned in the second quarter:

Colgate-Palmolive guru buys and sells

First Eagle Investment (Trades, Portfolio), with 12,475,255 shares at the end of the second quarter, held the largest stake, representing 1.46% of Colgate-Palmolive's outstanding shares. That's after a reduction of less than one quarter of one percent during the second quarter.

Jim Simons (Trades, Portfolio) of Renaissance Technologies owned 5,591,984 shares after a reduction of 20.39% during the second quarter. Pioneer Investments (Trades, Portfolio) added 67.9% to its holding during the quarter for a total of 2,871,391 shares.

Conclusion

After two centuries of operation, Colgate-Palmolive is obviously a mature company, but it remains committed to growth. Its finances are stronger than it gets credit for, in my opinion. It is also a very profitable company with good margins. However, the rate of growth has been weak over the past three years.

Still, it's been enough to pay for a higher dividend. For income investors who like the slow and steady approach, this company is probably as safe and consistent as they come. It could be worth waiting until the price drops again, making a higher initial dividend possible. Value investors who want to own the stock will likely want to wait until the price comes down enough to provide a reasonable margin of safety. Growth investors looking for capital gains might try to ride the short, upward trend, but would improve their odds by waiting for a lower price.

Disclosure: I do not own shares in any companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


Rating: 4.0/5 (1 vote)

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Comments

Praveen Chawla
Praveen Chawla premium member - 2 months ago

Good article, Robert. I see colgate almost as a bond proxy given its excellent financial stability and defensive nature. It will always trade at a premium. I am perplexed as to why GF would give it a low predictability score. If you look at the cash flows and earnings the trajectory is very steady.

Robert Abbott
Robert Abbott premium member - 2 months ago

Thanks, Praveen!

You make good points, particularly the one about it being a proxy for bonds.

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