This article originally appeared on The DIV-Net April 19, 2010.
Linked here is a detailed quantitative analysis of Colgate-Palmolive Company (CL). Below are some highlights from the above linked analysis:
Company Description: Colgate-Palmolive Company is a consumer products company, whose products are marketed throughout the world. Colgate’s Oral Care products include toothpaste, toothbrushes, oral rinses, dental floss and pharmaceutical products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- 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. The stock is trading at a 8.0% discount to its calculated fair value of $91.57. CL earned a Star in this section since it is trading at a fair value.
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:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- 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 47 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)? 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:
- NPV MMA Diff.
- Years to > MMA
CL earned a Star in this section for its NPV MMA Diff. of the $1,708. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CL has. If CL grows its dividend at 12.5% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.02%.
Other:CL is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
Conclusion: CL earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks CL as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $123.70 before CL’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.64%.
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 8.9%. This dividend growth rate is significantly less than the 12.5% used in this analysis, thus providing a margin of safety. CL has a risk rating of 1.25 which classifies it as a low risk stock.
CL dominates the oral care category with a worldwide toothpaste market share of almost 45%. The company’s confidence in its growth prospects are reflected in it most recent dividend increase of 20.5%. Historically, the company has produced strong free cash flow. Its debt level has prevented me from purchasing the stock in the past. CL’s debt to total capital has been as high as 91% in 2002. Over the years the company has steadily decreased this ratio to its current 51%. Though it is still above the 51% I prefer, the trend is headed in the right direction and the company’s FCF payout is low enough to support continued debt reduction. I am looking to initiate a CL position in May. For additional information, including the stock’s dividend history, please refer to its data page.
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 held no position in CL (0.0% of my Income Portfolio). See a list of all my income holdings here.