Sunday, March 10, 2013

Colgate-Palmolive Dividend Stock Analysis

I still owe a stock analysis from February, so today we'll look at Colgate-Palmolive (CL).  They are a dividend champion announcing their 50th consecutive year of dividend increases last week.  Colgate-Palmolive closed trading on Friday, March 8th at $115.74.

Company Background:

Colgate-Palmolive Company, together with its subsidiaries, manufactures and markets consumer products worldwide. The company operates in two segments: Oral, Personal and Home Care; and Pet Nutrition. It offers oral care products, including toothpaste, toothbrushes, and mouth rinses, as well as dental floss and pharmaceutical products for dentists and other oral health professionals; personal care products comprising liquid hand soaps, shower gels, bar soaps, deodorants, antiperspirants, shampoos, and conditioners; and home care products, such as laundry and dishwashing detergents, dishwashing liquids, household cleaners, oil soaps, bleaches, and fabric conditioners. The company provides its oral, personal, and home care products primarily under the Colgate Total, Colgate Sensitive Pro-Relief, Colgate Max Fresh, Colgate Optic White, Colgate Luminous White, Colgate 360°, Colgate Plax, Palmolive, Protex, Softsoap, Sanex, Irish Spring, Speed Stick, Lady Speed Stick, Caprice, Ajax, Axion, Fabuloso, Murphy’s, Suavitel, Soupline, Sorriso, Kolynos, elmex, Tom’s of Maine, and Mennen brand names to wholesale and retail distributors. It also offers pet nutrition products for dogs and cats. The company markets its pet foods through pet supply retailers and veterinarians for everyday nutritional needs under the Hill’s Science Diet brand name; and a range of therapeutic products through veterinarians and pet supply retailers to manage disease conditions in dogs and cats under the Hill’s Prescription Diet brand name.

DCF Valuation:

Analysts expect Colgate to grow earnings 9.70% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a two stage DCF analysis with a 10% discount rate yields a fair value price of $113.58. This means the shares are fairly valued.

Graham Number:

The Graham Number is negligible due to the low book value.  The value is $23.29, but will be excluded from the calculations.

Average High Dividend Yield:

Colgate's average high dividend yield for the past 5 years is 2.82% and for the past 10 years is 2.58%. This gives target prices of $94.94 and $108.27 respectively based on the current annual dividend of $2.72.  I was actually pretty surprised to see that Colgate's average high dividend yield was not higher than 3.00% but the results are the results.  I think you'll start to see the average yield start to creep up but we'll use the 5 year average in our calculations.  Colgate is currently trading at a 21.9% premium to the average high dividend yield valuation.


 Average Low PE Ratio:

CL's average low PE ratio for the past 5 years is 15.59 and for the past 10 years is 17.90.   This corresponds to a price per share of $89.34 and $102.56 respectively based off the analyst estimate of $5.73 per share for fiscal year 2013.  The 5 year and 10 year low PE price targets are overvalued by 29.6% and 12.9%, respectively.  To be conservative I'll use the 5 year average.

Average Low P/S Ratio:

Colgate's average low PS ratio for the past 5 years is 2.12 and for the past 10 years is 2.23.  This corresponds to a price per share of $80.66 and $84.91 respectively based off the analyst estimate for revenue growth from FY 2012 to FY 2013.  Their current PS ratio is 3.16 over the last 12 months.  For the sake of being conservative I'll use the 5 year average.  CL is currently trading at a 43.5% premium.

Dividend Discount Model:

For the DDM, I assumed that Colgate will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 9.02%.  After that I assumed they can continue to raise dividends for 3 years at 75% of 15% or 6.76% and in perpetuity at 3.50%.  The dividend growth rates are based off fiscal year payouts and don't necessarily correspond to quarter over quarter increases.  To calculate the value I used a discount rate of 10%. Based on this, CL is worth $55.52 meaning it's overvalued by 108.5%.

PE Ratios:

Colgate's trailing PE is 22.47 and it's forward PE is 18.26.  The PE3 based on the average earnings for the last 3 years is 24.11.  I like to see the PE3 be less than 15 which Colgate is currently well over.  Compared to it's industry, CL seems to be undervalued versus CHD (24.88) and overvalued versus CLX (19.74) and PG (17.52).  Against the industry as a whole, Colgate is overvalued with the industry carrying a PE of 21.31.  All industry comparisons are on a TTM EPS basis.  Colgate's PEG for the next 5 years is currently at 2.08 while CHD is at 1.90, CLX is at 2.42, PG is at 2.44, and the industry is at 1.72.  A low PEG ratio is better because it means that you're paying less for the growth of the company.

Fundamentals:

Colgate's gross margin's for FY 2011 and FY 2012 were 59.8% and 60.4% respectively. They have averaged a 58.8% gross profit margin since 2001 with a low of 57.3% in FY 2005. Their net income margin for the same years were 14.5% and 15.4%.  Since 2001 their net income margin has averaged 13.4% with a low of 11.1% in FY 2006.  I typically like to see gross margins greater than 60% and at least higher than 40% with net income margins being 10% and at least 7%.  Colgate is right where I like to see on the gross margin and is 50% above on the net income margin.  There's no issues here.  Of course each industry is different and allows for different margins, so let's see how CL has done when compared to their industry.  For FY 2012, Colgate captured 110.2% of the gross margin for the industry and 136.3% of the net income margin.  They're able to turn much more of their revenue into profit compared to their competitors which is great to see.

Share Buyback:

Colgate's shares outstanding have been in an overall downtrend with an average decrease of 1.47% per year since 2001.  Over that time they've bought back 15.0% of their shares outstanding.  By repurchasing shares, CL is able to increase EPS and management can return cash to shareholders this way by increasing the ownership stake of the company for all the outstanding shares.  However, if the shares are being bought at overvalued prices this is detrimental to the shareholders,


A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.

Dividend Analysis:

Colgate is a dividend champion recently announcing and increase which marked their 50th consecutive year.  Their current annual dividend sits at $2.72 for a yield of 2.35%.  CL's annual increases for the last 1, 3, 5 and 10 years has been 9.02%, 9.43%, 11.26% and 11.32%.  These numbers are different from the actual quarterly increases since they are based off the dividends paid out during each fiscal year.  Their payout ratio has averaged 42.5% since 2001.  I'd like to see the payout ratio come down, but at less than 50% it's not concerning.


Colgate's free cash flow per share has been great since FY 2008 with dividends only taking up an average of 46.4% of the available FCF.  I am a little concerned that the total shareholder return, share buybacks plus dividends, has averaged 113.3% since FY 2008.  They've still managed to increase their cash per share but I would like to see this come down since it appears that debt has been their modus operandi lately.


Return on Equity and Return on Capital Invested:

Colgate's ROE is can be ignored due to the low equity current equity value.  Their ROCI has been stellar, averaging 35.8% since 2001 with a low of 31.3% and a high of 41.5%.  For ROCI I don't necessarily look for any absolute values, rather I like to see stable or increasing levels over the long term.


Revenue and Net Income:

Since the basis of dividend growth is revenue and net income growth, we'll now look at how Colgate has done on that front.  Their revenue growth since 2001 has done fairly well at 6.3% per year and their net income has been growing at a 7.4% rate.  Since their net income has been growing faster than revenue, their net income margin has increased from 12.2% to 15.4% between FY 2001 and FY 2012.  I love seeing the net income on a steady rise because it means the company is turning more dollars of sales into profits.


Forecast:



The chart shows the historical high and low prices since 2001 and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 5 years.  I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. In this case the target low PE is 15.59 and the 0.75 * PE is 11.69.  This corresponds to an entry price of $67.01 based off the expected earnings for FY 2013 of $5.73. The average PE price would give a target price of $109.31.  Currently CL is trading at a $48.73 premium to the 75% low PE target price and a $6.43 premium to the average PE price.  I highly doubt that we'll see Colgate trading for a PE ratio around 12 because even during the Great Recession it only traded down to just shy of 13.

Conclusion:

The average of all the valuation models gives a target entry price of $86.81 which means that Colgate is currently trading at a 33.3% premium to the average.. I've also calculated it with the highest and lowest valuation methods thrown out.   In this case, the DCF and DDM valuations are removed and the new average is $88.31.  Colgate is trading at a 31.0%% premium to this price as well.

Assuming that Colgate can grow their earnings and dividends at the rates that I assumed you're looking at solid returns for the next 5 years.  In 2018 EPS would be $8.37 and slapping an average PE of 19.07 gives a price of $159.60.  Over the next 5 years you'd also receive $17.75 in dividends for a total return of 153.23% which is good for a 8.91% annualized rate.  If you purchase at my target entry price of $88.36 your projected 5 year total return is 200.71% for an annualized return of 14.95%.

Overall, I would say that Colgate is currently overvalued.  It's not in gross overvaluation territory on a historical basis, but is definitely at the high end of it's normal valuation range.  Colgate recently announced a 2 for 1 stock split and their next quarterly dividend to be paid on May 15th with a record date of April 23rd.  Of course the stock split does nothing to the value of the underlying company but it's usually perceived that it does.  I hope to see a bit of a sell-off in Colgate because I'd love to own a company that's been increasing dividends for 50 years and paying uninterrupted dividends for over 100 years.  That's very impressive since most companies don't last 50 years let alone over 100 and having the capability to pay a dividend that whole time is wonderful for investors.  Colgate has typically traded for a premium to the market and I don't expect to get in anytime soon at bargain basement prices.  I'd be interested in starting a position closer to $100 or $50 post split which would be closer to the fairly valued range.

Unfortunately Colgate isn't on the list for mini-options and with the upcoming split won't be.  However, the $50 range is easier to stomach with selling puts for me since it ties up $5,000 and not $10,000.  If there's an opportunity to purchase before the split I'd love to get in because I expect there to be some decent capital appreciation since the markets love a stock split.

To check out more reports check out my Stock Analysis page.

What do you think about Colgate-Palmolive as a DG investment at today's prices?

9 comments:

  1. My metrics also show that CL is expensive. I get a super cheap price of $86.20 (3.16% dividend yield). The 3 and 5 year average high yield are 2.87% and 2.93% respectively. Also, its forward PE of 18 is too high for me. Good job on the analysis.

    ReplyDelete
    Replies
    1. ADY,

      I'd be interested closer to the $100 pre split / $50 post split but would only buy around a 1/4 position at those prices. Down at the lower $90's / upper $80's and I'd be scooping up shares. I love the consumer staples companies, nice solid growth in the underlying business and the dividend growth. Glad to see that are metrics are jiving.

      Thanks for stopping by!

      Delete
  2. Great analysis. I'm inclined to agree with you, CL is a touch overvalued. I've been wanting to buy some CL for a while, but it almost always seems to be overvalued when I'm considering it. Kind of like it's taunting me. I am excited about the stock split coming up. With some luck, that might provide some nice buying opportunities.

    ReplyDelete
  3. MyFIJ,

    I just hope it doesn't have a bounce up after the split. Unfortunately most of the major consumer staples companies have gone up with the market and sitting at least at fairly valued right now. Looking through the analysis, I saw just how undervalued it was the last few years and I just never picked any up.

    Thanks for stopping by!

    ReplyDelete
  4. Pursuit,

    Great analysis here. Love the breakdowns.

    I agree. CL is very pricey here. The weird thing about CL is that it's chronically overvalued. I'm not quite sure why the market places such a premium on the business, but obviously that premium has simply expanded with the broad market run-up.

    I love consumer companies the best, but find few in my wheelhouse right now. GIS was one I was highly interested in, but it was literally a day before the HNZ deal. That left me in the dust. Oh well. I'll continue hunting!

    Best wishes.

    ReplyDelete
    Replies
    1. DM,

      It's a shame that it's perpetually overpriced. It was well undervalued even last year but I missed out on it then. I'm afraid that with the upcoming split we'll see a runup to the split and then after the split which is just going to make it even more overvalued. But I'll just sit here and patiently wait until an opportunity comes up.

      The consumer staples are wonderful but like you mentioned there's not a whole lot that are in the fair value let alone the under value range. Once the economy picks up some more steam I expect to see a selloff in the slower growers which is great news for us DGIs.

      Thanks for stopping by!

      Delete
  5. CL is a great business. I agree with your assessment on overvaluation here. I like the consumer staples area also. I quite like Clorox as well, but I find even that to be overvalued at the moment. Maybe another candiate to sell puts against?

    ReplyDelete
    Replies
    1. Integrator,

      I wish I had looked more into CL before now. But that time has passed, at some point it'll get back to at least fairly valued or undervalued again. After the split I'll be looking at selling some puts if the right combination is there. I think it's a solid company but just a little too overpriced at the moment.

      Thanks for stopping by!

      Delete