This Stock Has Raised its Dividend for 51 Consecutive Years

Think of the last time you brushed your teeth.

Was it earlier today? Yesterday? An hour ago?

The thing is that people all around the world brush their teeth every single day.

According to this statistic, sourced from the American Dental Association, 49% of men brush their teeth twice per day, while 56.8% of women also brush their teeth twice per day. That’s a lot of tooth brushing!

But what does this have to do with making money and collecting rising dividends?

Quite a bit, actually.

I’d venture to guess the odds are good that ten or twenty years from now not much is going to change there.

If anything, more people around the world will also be taking care of their teeth as health standards across the world rise with a more general quality of life.

And that means more and more toothpaste, toothbrushes, floss, and mouthwash is going to be sold across the globe in the coming years.

Which is why I love a business like Colgate-Palmolive Company (CL).

They have the #1 market share in toothpaste worldwide, as their namesake Colgate brand is almost synonymous with toothpaste for many people. And because people generally take their oral care seriously for fear of losing teeth, demand for Colgate’s products should remain strong for the foreseeable future.

And strong demand means Colgate-Palmolive will be able to continue to profit and continue sending more and more dividends to shareholders. I like the way that sounds!

Colgate-Palmolive Company manufactures and markets consumer goods, with sales in more than 200 countries across the globe.

They operate in two segments: Oral, Personal, and Home care; and Pet Nutrition. The Oral, Personal, and Home care segment drove 87% of the company’s total sales in 2013. The other 13% were driven by the Pet Nutrition segment.

Colgate-Palmolive has long been a wonderful company. Founded in 1806, they’ve grown into a world leader in both oral care and pet nutrition. Their strong brands like Colgate, Palmolive, Ajax, Speed Stick, Irish Spring, Softsoap, and Hill’s ensures the company’s bright future and strong market share across the globe. What’s particularly impressive about Colgate is their international presence; approximately 80% of their sales come from international operations.

And their market share in the markets they operate shows dominance: they have a #1 market share in toothpaste; vet clinics; liquid hand soap; and hand dishwashing and fabric conditioners. That’s impressive!

Growth over the last decade across all areas of the business has been pretty solid. The fiscal year ends December 31.

Revenue is up from $10.584 billion in FY 2004 to $17.420 billion in FY 2013. That’s a compound annual growth rate of 5.69%, which isn’t bad at all. Like many companies, Colgate-Palmolive experienced some hiccups during the Great Recession, but growth has been on the mend since 2010.

Earnings per share growth has been even better, up from $1.17 to $2.38 during this same 10-year stretch. That’s good for a CAGR of 8.21%, which is rather strong. S&P Capital IQ predicts EPS to grow at a compound annual rate of 9% over the next three years, which would roughly be in line with what the company has been able to post over the last decade. These are very healthy numbers.

As a dividend growth investor, I look to the dividend as the ultimate sign of how shareholder friendly a company is. Is it growing? Is it easily covered via profit? Is it sustainable? Well, check, check, and check. Colgate-Palmolive has one of the longest track records of dividend growth out there, as they’ve raised their dividend payout for 51 consecutive years. That, my friends, is pretty serious.

And these raises haven’t been pittance; the company’s 10-year dividend growth rate is 11.4%. Now, the dividend payout ratio stands at 62%, which means 62 cents out of every $1 in earnings is being paid out in the form of a dividend. And the payout has risen faster than earnings, so I expect dividend growth to cool somewhat. But the dividend is in no danger here, and more likely to continue growing for many years to come. The current yield, at 2.07%, is still attractive as it’s higher than the broader S&P 500 index.

The company’s balance sheet looks good.

The long-term debt/equity ratio is a bit high, at 2.1, but the interest coverage ratio is quite strong, at 28.9.

So while they do have some debt on the balance sheet, interest expenses are very easily covered here.

The company also sports pretty strong profitability metrics. Net margin has averaged 14.34% over the last five years, and return on equity has averaged 93.4% over the same stretch. ROE is very high, as Colgate-Palmolive doesn’t require a lot of equity to sell toothpaste and soap. It’s also not a particularly asset-heavy business.

I just don’t know what not to like about this business. You have a very nice source of recurring revenue; once toothpaste is used up, you have to go out and buy more. Same goes for toothbrushes, mouthwash, soap, pet food, and deodorant.

And consumers typically stay loyal to certain brands when there is perceived quality and value. Furthermore, most people take their oral care quite seriously, and as such are less likely to scrimp when it comes to buying toothpaste and toothbrushes. You don’t want to buy low-quality toothpaste if it means that your teeth will suffer. So it makes sense that one would want to buy the best possible oral care one can afford.

Colgate-Palmolive’s strong international presence, leading market share across their portfolio of brands, huge economies of scale, strong profitability, and shareholder friendliness means this is a great business for any dividend growth investor to consider.

In addition, the risks appear fairly low for this company. There is always competition, but as long as the business can maintain its market share through innovation and consumer education it should continue to thrive. In addition, demand for their products should remain relatively static through all economic cycles, as even when the economy is doing poor people still have to brush their teeth and wash their dishes.

Unfortunately, it looks like investors are on to the secret. Shares right now are trading hands for a price-to-earnings ratio of 29.98, which is rich even for Colgate-Palmolive’s standards. That’s much higher than the broader market’s P/E ratio of ~18, as well as CL’s own five-year P/E ratio of 20.7. Generally speaking, a P/E ratio of 15 is a general rule of thumb for “fair value”, so the higher off this number you go the more likely you’re paying a premium for a stock.

I valued shares myself using a dividend discount model analysis, using a 10% discount rate (my desired rate of return) and a 7.5% growth rate. I used a rather aggressive growth rate due to both the lengthy track record of strong earnings growth and dividend growth. In addition, the company is expected to grow earnings at a rapid pace over the coming years due to their strong international presence and great brands.

The DDM analysis gives me a fair value of $61.92 on shares, which is below the $69.52 shares are trading at right now. This is a case of a really wonderful company trading for a rather rich price. I’d love to own a chunk of Colgate-Palmolive at some point, but paying 30 times earnings just seems a bit foolhardy right now.

Bottom line: Colgate-Palmolive Company (CL) is in the business of supplying the world with products like brand name toothpaste, mouthwash, toothbrushes, soap, and pet care. And business is good. People will continue to brush their teeth for the foreseeable future, and as long as that remains true this company should be able to retain its strong market share across the globe, and shareholders will continue to profit.

— Jason Fieber