Think of the last time you brushed your teeth.
Was it earlier today?
An hour ago?
The thing is, many people all around the world brush their teeth every single day.
That’s a lot of tooth brushing!
But what does this have to do with making money and collecting increasing dividends?
Quite a bit, actually.
I’d venture a guess that the odds are really good that people are still going to be regularly brushing their teeth 30 years from now.
If anything, more people around the world will also be taking care of their teeth as global health standards rise.
Indeed, many consumers lack proper oral hygiene, due to the inability to pay for and/or access proper oral care products. But as the world grows wealthier, this will surely change over time.
And that means more toothpaste, toothbrushes, floss, and mouthwash is most likely going to be sold across the globe in the coming years.
This is why I love a business like Colgate-Palmolive Company (CL).
And it’s also why I’m a shareholder. This stock is a holding in my personal six-figure dividend growth stock portfolio.
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.
Strong, and increasing, demand means Colgate-Palmolive should be able to continue to increase its 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 85% of the company’s total sales in fiscal year 2016. The other 15% of sales was 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-Palmolive is their international presence: approximately 79% of their revenue is generated from international sales, with 50% of sales occurring in emerging markets.
Looking at business growth, the company has managed solid, if a bit underwhelming top-line and bottom-line growth over the last decade. The fiscal year ends December 31.
Revenue grew from $13.790 billion in FY 2007 to $15.195 billion in FY 2013. That’s a compound annual growth rate of 1.08%.
This number would appear to be rather disappointing at first glance; however, the company has recently dealt with a number of issues that have negatively affected its reported revenue figures: the deconsolidation of Venezuelan operations and currency impacts (relating back to the company’s prolific international exposure) have both conspired to harm sales numbers.
Looking at pure organic growth, though, shows how far the pendulum can swing: while FY 2016 reported sales showed a 5% YOY decline, the number swung to 4% YOY growth when excluding foreign exchange, acquisitions, divestments, and the impact of the deconsolidation of the Venezuelan operations.
Earnings per share growth has been even better, up from $1.60 to $2.72 during this same 10-year stretch. That’s good for a CAGR of 6.07%.
A combination of buybacks – the outstanding share count is down by ~16% over the last decade – and expanding margins helped drive excess EPS growth.
Moving forward, CFRA is anticipating that Colgate-Palmolive will compound its EPS at an annual rate of 9% over the next three years, citing lessening foreign exchange pressure, the significant exposure to emerging markets, continued buybacks, and the cost savings to be realized by recent restructuring efforts.
If this growth rate materializes, this would obviously be a nice acceleration off of what the company has delivered over the last decade.
Frankly, this would be closer to the kind of growth long-term shareholders have come to expect from the company, and it would be roughly in line with what the company has done over a longer period of time.
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 54 consecutive years.
In addition, the company has paid uninterrupted dividends for 122 consecutive years.
That, my friends, is pretty serious.
And it easily qualifies the stock as a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list, which contains data on more than 800 US-listed stocks that have raised their dividends each year for at least the last five consecutive years.
Meanwhile, the company’s 10-year dividend growth rate is 8.6%.
So it’s not like these are tiny increases.
That said, the dividend growth has slowed as of late, which shouldn’t be a surprise.
Combining a dividend that’s growing faster than earnings with a business that has seen its EPS erode a bit in the face of a few near-term challenges will do that.
The dividend payout ratio now stands at 61.2%, which means ~62 cents out of every $1 in earnings is being paid out in the form of a dividend.
That’s a bit elevated compared to where it’s historically been at.
But the dividend is in no danger here.
And it’s highly likely that Colgate-Palmolive continues to hand out dividend increases for many years to come. In fact, dividend growth acceleration could very well materialize over the next year or two if CFRA’s aforementioned growth projection manifests.
That dividend growth will come on top of the stock’s current dividend, which looks fairly appealing.
The stock’s yield, at 2.1%, is a bit higher than the broader market. And it’s also roughly in line with the stock’s own five-year average yield.
The company’s balance sheet is strong.
The long-term debt/equity ratio isn’t meaningful due to negative shareholders’ equity, but the interest coverage ratio is a stellar 26.
The company also sports robust profitability, which shouldn’t be a surprise when considering the numerous high-quality and well-known premium brands they control.
While return on equity can’t be figured due to the previously noted negative equity, the company has averaged net margin of 12.93% annually over the last five years.
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, meaning they’re 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 29.85, which seems a bit rich
That’s much higher than where the broader market is at. And while it’s in line with the stock’s own five-year average P/E ratio, that average is skewed by a period that was marked by exceptionally-low company GAAP EPS (due to the troubles in Venezuela).
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.
That DGR is arguably aggressive, as recent dividend growth has been in the low single digits.
But the long-term dividend growth rate is above this level. And a proposed acceleration in EPS could allow for like acceleration in the dividend growth. Plus, I’m giving this business some benefit of the doubt, seeing as how it has one of the most impressive dividend growth track records in existence.
The DDM analysis gives me a fair value of $68.80 on shares, which is below the $74.71 price shares are trading at right now.
As such, the stock looks moderately overvalued right now. Prospective investors may want to wait for a more appealing valuation before buying this stock.
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. It seems likely that people will continue to take care of their teeth for the foreseeable future, with the odds pretty good that demand for high-quality oral care will only increase in emerging markets (where the company is positioned particularly well). As long as this remains true, this company should be able to retain its strong market share across the globe and reward its shareholders with increasing dividends for years to come.
— Jason Fieber