Colgate-Palmolive’s Growth Prospects & Total Returns
Colgate-Palmolive Company (NYSE:CL) is experiencing short-term headwinds because of its global reach. The company is suffering from the strong United States dollar.
Source: 2015 Consumer’s Staple Conference, slide 6
Despite these headwinds, Colgate-Palmolive’s long-term growth prospects remain bright.
The company has compounded earnings-per-share at 7.1% a year over the last decade, with dividends growing 10.1% over the same time period.
Going forward, I expect Colgate-Palmolive to deliver earnings-per-share growth of between 6% and 8% a year, in line with historical results. The company’s long-term growth driver is the rising middle class in emerging markets – especially India and China.
Source: Third Quarter, 2015 Presentation, slide 11
The company’s expected 6% to 8% earnings-per-share growth combined with Colgate’s current 2.4% dividend yield gives investors in Colgate-Palmolive expected total returns of 8.4% to 10.4% a year going forward.
Recession Performance
Colgate-Palmolive’s branded consumer products did exceptionally well during the Great Recession of 2007 to 2009.
The company managed to increase earnings-per-share each year throughout the Great Recession.
Colgate-Palmolive’s success during economic weakness is attributed to its low-cost consumer goods coupled with strong brand name recognition. People still need toothpaste and cleaning supplies; even during times of economic hardship.
Colgate-Palmolive’s earnings-per-share through the Great Recession are below to show how well the company performed through that difficult time:
– 2007 Earnings-per-share of $1.69
– 2008 Earnings-per-share of $1.83 (8.3% increase)
– 2009 Earnings-per-share of $2.19 (19.7% increase)
Valuation & Final Thoughts
Colgate-Palmolive is offering investors total returns of 8.4% to 10.4% a year before accounting for valuation.
Colgate-Palmolive is currently trading for a price-to-earnings ratio of 22.2. This is down from the company’s price-to-earnings ratio of ~27 a year ago. Still, Colgate-Palmolive appears to be a bit overvalued at current prices.
There’s no doubt the company has a strong competitive advantage and a shareholder friendly management. High quality businesses with expected total returns in the 9% to 10% range include:
– Altria Group Inc (NYSE:MO)
– The Coca-Cola Co (NYSE:KO)
– Wal-Mart Stores, Inc. (NYSE:WMT)
– General Mills, Inc. (NYSE:GIS)
– McDonald’s Corporation (NYSE:MCD)
– Procter & Gamble Co (NYSE:PG)
– Johnson & Johnson (NYSE:JNJ)
Generally, a business with a strong competitive advantage that is recession resistant should be purchased for no more than ~20 times earnings in today’s low interest rate environment. With the S&P 500 having a price-to-earnings ratio of 20 in recent years – and a long-term total return of ~9%, buying quality at a price-to-earnings ratio of 20 (or preferably, much less) means you are getting above average quality businesses for the same price of the average business in the S&P 500.
Colgate-Palmolive Company (NYSE:CL) is still a bit too pricey to justify initiating or adding to a position at current prices. Still, the company’s favorable long-term growth prospects and strong competitive advantage make the company a long-term hold based on The 8 Rules of Dividend Investing.
Disclosure: None
