Company Description: Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care and pet nutrition products in more than 200 countries and territories.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CL is trading at a premium to all four valuations above. Since CL's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 11.4% premium to its calculated fair value of $93.42. CL did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CL earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. CL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1895 and has increased its dividend payments for 49 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
CL earned a Star in this section for its NPV MMA Diff. of the $731. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CL has. If CL grows its dividend at 7.5% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 2.42%. CL earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Memberships and Peers: CL is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Procter & Gamble Co. (PG) with a 3.3% yield, Kimberly-Clark Corporation (KMB) with a 3.5% yield and Clorox Corporation (CLX) with a 3.5% yield.
Conclusion: CL did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks CL as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $120.44 before CL's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 49 years of consecutive dividend increases. At that price the stock would yield 2.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is only slightly lower than the 7.5% used in this analysis, thus providing no margin of safety. CL has a risk rating of 1.50 which classifies it as a Low risk stock.
Demand for household and personal care products is generally stable and not affected by changes in the economy. About 80% of CL's sales come from outside the U.S., with over 50% from emerging markets. The company should benefit from moderating competitive pressure in many of its emerging markets. Long-term, CL's stringent focus on cost management help it to manage through future competitive challenges.
Since my review of CL back in November 2011, three important things have changed: 1.) The share price has increased significantly from $86.73 to $104.04, 2.) the dividend growth rate has dramatically declined from 11.8% to 7.5%, and 3.) its debt to total capital has increased from 62% to 68%. With a calculated fair value of $93.42 CL is trading at a premium and its dividend fundamentals are weaker. When I combine the above with a current yield well below my minimum, I will stay on the sideline for now.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in CL (0.0% of my Dividend Growth Portfolio). I hold positions in PG and KMB. See a list of all my dividend growth holdings here.
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Tags: [CL] [PG] [KMB] [CLX]
