Colgate-Palmolive (CL) lifts dividend by 3%, but offers limited value due to high P/E

Colgate-Palmolive’s (NYSE:CL) dividend was increased by a modest 3%.  Its overall yield is 2.15%. The firm started paying a dividend in 1993.

Colgate-Palmolive is one the largest consumer product firms in the world.  It not only sells, but also manufactures products.  It is segmented into two divisions, Personal Care and Pet Nutrition. The company’s well-known products include Colgate Toothpaste, Palmolive, Irish Spring, Ajax, Speed Stick & Lady Speed Stick, and Softsoap.  Its major pet brand is Hill’s Science Diet products.  The firm is located in New York City and was founded in 1806.

Colgate-Palmolive has maintained a three-year growth rate of dividends of 4 percent. Colgate-Palmolive currently ranks 4th in dividend yield within the large cap consumer goods, personal products category. The quarterly dividend for the May payment will be $0.40 versus the prior year rate of $0.39 per share. Colgate-Palmolive is not a member of our Top 100 Dividend Stocks.  (see below).

The dividend will be paid at the new higher rate on May 15, 2017, to shareholders of record at close of business on April 21, 2017. Colgate-Palmolive Co. is currently priced at $73.26. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
4/21/2017 0.4
1/19/2017 0.39
10/20/2016 0.39
7/20/2016 0.39
4/20/2016 0.39
1/21/2016 0.38
10/21/2015 0.38
7/21/2015 0.38
4/21/2015 0.38
1/21/2015 0.36
10/15/2014 0.36
7/16/2014 0.36
4/17/2014 0.36
1/22/2014 0.34
10/18/2013 0.34
7/19/2013 0.34
4/19/2013 0.34
1/22/2013 0.31
10/19/2012 0.31
7/20/2012 0.31
4/20/2012 0.31
1/20/2012 0.29
10/21/2011 0.29
7/22/2011 0.29
4/21/2011 0.29
1/21/2011 0.265
10/21/2010 0.265
7/22/2010 0.265
4/22/2010 0.265
1/21/2010 0.22

Analysis of Colgate-Palmolive is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 2.15% 268
Dividend Growth (3-7 year avg) 5% 303
Forward P/E 25.74 265
S&P Financial Rating AA- 40
Beta 0.75 75
Total Score 951
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
2.15% 4% 6.6% 18.65 4.01 2.55 4.30 1.99% 2.46%

Positives;

  • Colgate-Palmolive has paid out a dividend consecutively for the past 24 years.
  • Colgate-Palmolive maintains an investment grade rating of AA-.
  • Colgate-Palmolive maintains a beta of 0.75, lower than the average company.

Negatives;

  • Colgate-Palmolive’s current dividend yield (2.15%) is lower than its five-year average historical dividend yield.
  • Colgate-Palmolive is trading above its ten-year average price/sales (P/S) ratio and at an elevated price/earnings ratio (PE) of 25.7 next year’s earnings.

Latest Earnings & Overall Analysis:

Colgate-Palmolive issued its earnings data on January 27th. The company reported $0.68 earnings per share for the Q4 quarter, meeting the consensus estimate of $0.75.  Colgate-Palmolive net income for Q4 was $606 million. Total revenue came in at $3.7 billion, below consensus estimates of $3.89 billion. The company projected flat EPS growth for next year due to a small sales gain with negative currency effects.

Organic sales were higher though to 1.5% in the fourth quarter. This was due to a pricing rise of 2% along with better sales in Latin America. Europe’s net sales and organic sales dropped in Q4.  In fact, organic sales fell by over 3% in Q4 with weak volume in France. Organic sales also declined at a 2% rate within the Asia-Pacific region. As for pet care, sales were flat for Q4 due to issues in the pet facility channel.  For the full year the firm generated $2.74 in earnings per share.

2016 2015 2014 2013 2012
Earnings per Share 2.74 1.53 2.38 2.41 2.55
Annual Dividend 1.55 1.50 1.42 1.33 1.22
Payout Ratio 56.56% 73.17% 59.93% 55.16% 47.85%

The firm demonstrated profit improvement for fiscal year 2016, as adjusted gross margins rose by 1.8%.  Operating margins also advanced to 28%.  Although the firm continues to face weak sales growth, the firm still maintains leading brands and strong negotiating power with retail vendors.  Its growth is balanced between annual price increases in the 2-3% range along with advancing sales of products (1-3%) per year. The firm is also a heavy advertiser. It spends nearly 1/10th of its overall revenue on ads throughout the globe to improve product awareness. Additionally it spends 1-2% of revenue annually for research & development.

The firm is very global in nature, with over 75% of revenue coming from overseas markets. In fact, half of all sales now come from emerging economies.  Due to the high overseas market exposure, unfavorable foreign exchange continues to have a strong negative impact on Colgate-Palmolive.   In general over the last few years with a strong dollar, it has cost the firm 1-3% a year off the top line.

We expect Colgate-Palmolive to generate revenue of close to $16 billion for fiscal 2017 based upon improving emerging markets and a steady dollar.  That would be a rise of 3.0% on a year-over-year basis and back on par with 2015.  The firm needs to turn around total revenue, which declined 7% in 2015 and nearly 5% last year.  Analysts expect the company’s fiscal 2017 adjusted EPS (earnings per share) to be $2.96, a rise of 5.3%. We are on the more conservative side with an estimate of $2.85

The firm hiked its dividend 1 cent this year and thus kept its status of a dividend grower.   The large product company has paid uninterrupted dividends on its stock since 1895, a remarkable achievement.  But with over three-quarters of its business overseas, the firm’s total revenue will depend highly upon currency movements and economic growth in volatile emerging markets. Margin expansion has been a key for the firm, but how much the company can continue to improve margins when they are at historical highs will be challenging.  At a current price of $73.37, Colgate-Palmolive trades at 25.74 our EPS estimate. This is far above the P/E of the S&P 500. It also trades at 4 times revenue, which places its valuation towards the high end of its 10-year history.  The valuation has accelerated further when the stock rose from early February from $64 a share. Despite the stellar credit rating of AA- and low stock beta (0.75), the stock is richly priced with low growth prospects and minimum dividend increases.

Earnings per Share 2017 (projected) $2.85
Dividend $1.60
Payout Ratio 44.44%
Based on the firm’s elevated P/S ratio, P/E ratio, low dividend growth rate, and below average dividend yield, Colgate-Palmolive Company does not qualify as one of our Top 100 Dividend Stocks.  Please subscribe to our monthly premium newsletter to find out more about which stocks are listed in our model portfolio.  

Colgate-Palmolive Co. Dividend Yield Historical Chart (Click to enlarge)

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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