by Dividend Growth Investor | February 21, 2014 9:15 am
Colgate-Palmolive (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company operates in two segments: Oral, Personal and Home Care; and Pet Nutrition. This dividend king has paid dividends since 1895 and has increased them for 50 years in a row.
The company’s latest dividend increase was announced in March 2013 when the Board of Directors approved a 9.70% increase in the quarterly annual dividend to 34 cents per share. The company’s peer group includes Procter & Gamble (PG), Clorox (CLX), and Kimberly Clark (KMB).
Over the past decade this dividend growth stock has delivered an annualized total return of 12.60% to its shareholders.
The company has managed to deliver a 9% average increase in annual EPS over the past decade. Colgate-Palmolive is expected to earn $2.83 per share in 2013 and $3.09 per share in 2014. In comparison, the company earned $2.58 per share in 2012.
In addition, between 2004 and 2013, the number of shares decreased from 1135 million to 937 million.
Colgate generates over 80% of its sales from outside of the US. The growing emerging markets in Latin America and Asia and the rising middle class in these markets could present an excellent opportunity for Colgate Palmolive. Latin America accounts for one third of sales, while Asia/Africa accounts for over one fifth of sales.
The issue with overexposure to Latin America is that the continent has been prone to currency devaluations, which could impact profitability. Another issue could come from rising commodity costs, which could pressure margins and profitability despite expectations for rising volumes. Given the strong brand names of many of Colgate’s products however, the company could mitigate this by passing on cost increases to consumers.
The toothpaste market is characterized by high penetration by branded products, as few people are going to save a few cents and put an unknown paste for their teeth. In addition there is brand loyalty, which results in recurring revenue streams from millions of customers worldwide. The company also has wide global reach, and large scale of operations. The strong brands, customer loyalty and global scale of operations are indicative of a wide moat by this company.
In 2012, Colgate-Palmolive initiated a four year Global Growth and Efficiency Program, in an effort to simplify and standardize work processes, reduce structural costs, and increase sales globally. The company is expected to spend anywhere between $1.1 to $1.25 billion through 2016, with annual benefits expected in the $365-$435 million annually. These benefits will be reinvested in items such as new products and in brand building. As a result of the program, 6% of global workforce will be laid off by 2016.
In general, earnings per share will increase through emerging market sales growth, share buybacks, cost restructurings. I can foresee sales to grow by 5 – 6 %year, which could easily translate into earnings per share growth of 9- 10% for the foreseeable future.
The annual dividend payment has increased by 11.40% per year over the past decade, which is higher than the growth in EPS. This was accomplished through the expansion of the dividend payout ratio. Future growth will be limited by any growth in earnings per share.
An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. Since 1985, Colgate-Palmolive has been able to double dividends every seven years on average.
The dividend payout ratio increased from 37% in 2003 to almost 47% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The company enjoys really high returns on equity, which is common for most high quality dividend payers that do not require a lot of equity to operate the business. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is overvalued, as it trades at a P/E of 22.60 and yields only 2.10%. I am analyzing the company because I believe it is quality dividend growth stock, which will be a very good addition to my portfolio on dips below $55-$56.
Full Disclosure: Long CLX, PG, KMB, CL
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