When it comes to oral hygiene products, Colgate-Palmolive Company (CL, Financial) enjoys a significant lead over bigger players in the larger personal hygiene products market such as Unilever (UN, Financial) and the much bigger Procter & Gamble Co. (PG, Financial). At the end of 2014, according to the management, Colgate-Palmolive owned 44.3% of the global toothpaste market, 33.5% in the toothbrush space and 38.5% of mouthwash sales worldwide. But the markets haven’t expressed much confidence in the company’s shares in the last 16-18 months. The share price has moved up by just about 5% in the last one year and less than 2% in the last three months. What does this mean for potential investors?
Reliance on oral care
For the year 2014, oral care accounted for 46% of the company’s total revenues and that is a very huge chunk coming from one segment alone. This would ordinarily be a cause for concern but, discounting currency impacts for a moment, this segment grew by 5.2% during the year which is a full 2% more than the global market that grew by 3.2% in the same time. The company has seen major growth coming from emerging markets such as Latin America, Asia and Africa/Eurasia regions. Given the continuing economic uncertainty in much of the U.S. and Europe, most of the growth in this segment will continue to come from the emerging markets.
Currency trouble
Selling its products in 225 countries, Colgate-Palmolive generates over 80% of its revenue outside the domestic market. This extremely high share of international business as a share of its total business has hurt the company in recent times as the U.S. dollar has appreciated against other currencies. Except in Asia, foreign exchange caused the net growth to turn negative despite positive organic growth in all other international markets. The company increased prices to offset the currency imbalance but these had to be controlled to avoid the risk of losing customers to other cheaper brands.
Pet care business
About 14% of the company’s profits come from its Hill’s pet care segment and it has traditionally done well, but according to analysts at Citibank (C, Financial), this segment has taken a hit since 2009 due to the general macroeconomic downturn and the entry of new aggressive players in the market that have increased competition.
Caring for investors
From an investor’s perspective, Colgate-Palmolive is a great company that has regularly paid dividends, uninterrupted since 1895, and has maintained a five-year dividend growth rate of over 10%. For 2015, the company has announced a 6% rise in dividends and also a share repurchase program worth $5 billion. Its dedication to return value to its investors is unquestionable.
Conclusion
Colgate-Palmolive spends money on research to come up with innovative products to appeal to various price points and this is going to work very well for the oral care segment, a market where it is well entrenched and that is expected to grow significantly in the years to come. Its chief problem seems to be the general economic environment in the developed countries and the strong dollar. The former is already showing signs of improvement, even if it takes another year or two to actually happen. And the latter is also a phenomenon that cannot last indefinitely. So the current weakness in the stock is an attractive entry point for long-term holding, and we recommend a BUY.
