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 discount to only 3.) above. Since CL's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 72.2% premium to its calculated fair value of $43.13. 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 one Star in this section for 1.) 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. The company has paid a cash dividend to shareholders every year since 1895 and has increased its dividend payments for 53 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
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in CL would be less than a similar amount invested in MMA earning a 20-year average rate of 2.79%. If CL grows its dividend at 2.6% per year, it will never equal a MMA yielding an estimated 20-year average rate of 2.79%.
Peers: The company's peer group includes: Procter & Gamble Co. (PG) with a 3.0% yield, Kimberly-Clark Corporation (KMB) with a 2.9% yield and Clorox Corporation (CLX) with a 2.3% yield.
Conclusion: CL did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks CL as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $36.38 before CL's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 53 years of consecutive dividend increases. At that price the stock would yield 4.3%.
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 7.9%. This dividend growth rate is higher than the 0.6% used in this analysis, thus providing no margin of safety. CL has a risk rating of 1.75 which classifies it as a Medium risk stock.
Demand for household and personal care products is generally stable and not affected by changes in the economy. A significant portion of CL's sales comes from emerging markets. This presents the company with more growth opportunity, but also more risk. Its continued focus on product innovation, along with globally recognized brands and presence in both developed and emerging markets will boost its long-term profitability.
Debt to total capital at 104% is flat with my previous review. Free cash flow payout is down slightly to 56% from 59%, but still slightly above my maximum. With a calculated fair value of $43.13, CL is trading at a significant premium. When I combine the above with a current yield that is well below my minimum, I will not materially add to my position in the near-term.
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 was long in CL (0.8% of my Dividend Growth Portfolio). I also hold positions in PG and KMB. See a list of all my Dividend Growth Portfolio holdings here.
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Tags: CL, PG, KMB, CLX,
