Updated March 31, 2021 by Bob Ciura

Over time, the Dividend Aristocrats have proven to be the best-performing stocks for dividend growth in the entire market. By and large, the Dividend Aristocrats hold leadership positions in their respective industries with lasting competitive advantages that enable them to generate long-term growth.

The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index with more than 25 consecutive years of dividend increases.

You can download the full table of all 65 Dividend Aristocrats as well as some key financial metrics like value for money and dividend yields by clicking the link below:

A select number of Dividend Aristocrats also qualify as Dividend Kings, an even more exclusive group of stocks that have raised their dividends for over 50 consecutive years.

Colgate-Palmolive (CL) is a dividend aristocrat and also a dividend king. Colgate-Palmolive’s long history of increasing its dividend can be traced back to its strong brands and dominance in several product categories.

Colgate-Palmolive has paid dividends continuously since 1895 and has increased its dividend payments for the past 58 consecutive years.

Colgate Palmolive stock appears to be slightly overvalued today, which could limit its total return. However, the stock remains a strong position for steady dividend growth year over year.

Business overview

Colgate-Palmolive dates back to 1806, making it one of the oldest companies on the US stock exchange. It was founded by William Colgate, who opened a starch, soap, and candle shop in New York.

Today the company makes oral care products such as toothpaste, personal care products such as soap, household cleaners, and pet foods.

Major brands include Colgate, Palmolive, Hill’s Science Diet and many more. The core segment is Oral Care, which accounts for almost half of sales. Colgate-Palmolive is a global giant. The company sells its products in over 200 countries and territories around the world and has annual sales of more than $ 17 billion.

Colgate-Palmolive has a highly diversified business model, both in terms of products and geographic markets. Roughly half of the company’s sales come from emerging markets, although reliance on these emerging markets has lessened somewhat lately.

This is due to the success of the company’s animal nutrition business, which continues to draw revenue from other segments. Emerging markets will be a key growth catalyst for the company’s further development. Colgate-Palmolive is number 1 in China with a market share of over 30%.

However, the company is also facing several challenges, including a strong US dollar, soaring costs and the ongoing coronavirus pandemic that could hold back future growth.

Growth prospects

Colgate-Palmolive has a world class portfolio of brands and high profit margins. However, Colgate-Palmolive has struggled to achieve significant growth in recent years. Fortunately, the company’s financial results improved significantly in 2020.

Colgate– –Palmolive reported fourthquarter and full– –Annual result on January 29thth, 2021 with results before Expectations on the income statement. Total sales increased by 7.5% over the course of the year– –over– –Year in the fourth quarter to $ 4.3 billion, as organic Sales growth was again strong.

The company posted organic sales growth of 8.5% in the fourth quarter, well above the consensus of + 5.4%.

Source: Investor Presentation

Two major specific growth catalysts for Colgate-Palmolive are currently growth in developing markets such as Latin America and the high growth pet business. In the fourth quarter of 2020 during North America produced + 8.5% organic sales, growth in Latin America + 10.5% and Pet Nutrition + 14.5%.

The company’s pet food products are a compelling growth catalyst for the future. Pet food is a growing industry in the US

We see that Colgate-Palmolive will average 5% annual earnings per share growth for the next five years. For example, product additions in premium soap and toothpaste lines should help drive additional sales growth in the years to come, and higher prices should help offset rising costs.

Competitive advantage and recession performance

Colgate-Palmolive has many competitive advantages that have driven its growth over the past 200+ years.

First, the company has built a dominant position in its core product categories, particularly toothpaste, where Colgate-Palmolive’s market share has grown steadily for many years. Today it has a higher market share than the three largest competitors combined.

Because of this high market share, Colgate-Palmolive may charge higher prices for its premium products and increase prices over time. Pricing power is a critical competitive advantage for consumer goods inventories.

Another great benefit to Colgate-Palmolive is that the products the company sells are necessities of modern life. Consumers need oral, personal and pet care products regardless of economic conditions. Colgate-Palmolive enjoys steady demand that gives the company consistent profitability even in recessions.

Colgate-Palmolive’s earnings per share during the Great Recession are shown below:

  • 2007 earnings per share of $ 1.69
  • 2008 earnings per share of $ 1.83, up 8.3%
  • 2009 earnings per share of $ 2.19, up 20%
  • 2010 earnings per share of $ 2.16 (down 1.4%)

Colgate-Palmolive posted positive earnings growth during the worst years of the recession in 2008 and 2009. The result fell slightly in 2010, but rose again in 2011 and thereafter.

The company’s strong performance from 2007 to 2010 is due to its strong business model and brands. These same traits have helped Colgate-Palmolive stay highly profitable despite the impact of the global coronavirus pandemic, increasing its dividend in 2020. When the next recession hits, we expect Colgate-Palmolive earnings to hold up very well again.

Colgate-Palmolive’s dividend is also very safe. The company has a forecast payout ratio of 54% for fiscal 2021, which is a very healthy payout ratio.

Valuation and expected return

With expected earnings per share of $ 3.25 for 2021, Colgate Palmolive stock has a price / earnings ratio of 24.4. While the stock has valued higher than this in the past, it is still up.

Given Colgate-Palmolive’s struggles in generating earnings growth in recent years, this doesn’t seem to justify a multiple of the premium valuation. Our estimate of the fair value is 23 times the result.

As a result, there is a risk of multiple contraction that would negatively impact shareholder returns. We see a headwind of -1.2% against the total annual return from the valuation, which will return to fair value over the next five years. This is a significant challenge for the stock as it is difficult to generate a compelling total return in such a scenario.

Even with projected earnings growth of 5% and the current dividend yield of 2.3%, the total return is expected to reach 6.1% per year by 2026. This makes the stock a hold in our view.

Final thoughts

Colgate-Palmolive is a high quality company with several leading brands in its category. The company has growth potential through product innovation, the Hill’s pet food brand, and growth in emerging markets.

However, now may not be the best time to buy Colgate-Palmolive shares as the stock appears slightly overvalued. The company needs to demonstrate that it can achieve higher growth to justify its premium rating.

Colgate-Palmolive does not offer a high dividend yield or high dividend growth. Regardless of the state of the global economy, however, investors can still count on steady dividend increases each year. The stock’s overvaluation limits future potential returns, but for investors looking for safe dividend and consistent dividend growth, Colgate-Palmolive is the place for you.

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