Colgate-Palmolive: Missing The Valuation For The Dividends

 

CL is a wonderful company with a great history.

But the price is hitting all-time highs.

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That should worry potential investors attracted by the great dividend history.

Colgate-Palmolive (NYSE:CL) is one of several consumer products companies that have become household names. Add in a regularly increased dividend and it becomes even more clear why investors like the company as much as consumers like its products. Only it’s hitting all-time highs and valuations are stretched. There’s a reason to be concerned…

A great company

There’s no two ways about it, Colgate-Palmolive is a great company. Its brands go well beyond its two namesakes Colgate and Palmolive. The list of names you know, and perhaps love, includes Speed Stick, Softsoap, Irish Spring, Murphy Oil Soap, and Ajax, among many others.

These are brands that span all sorts of product categories. But one common thread is that consumers tend to buy these products in good times and bad, and on a regular basis. Customers grow attached to them in many ways, and their spending ultimately becomes sticky. So recessions do hurt, but Colgate-Palmolive has managed to weather more than a few downturns in stride because of its enviable brand portfolio.

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The best example of how financially strong Colgate-Palmolive is may be its dividend. The company has increased its dividend for 53 consecutive years. That puts it among a very rare peer group of companies with 50 years or more of dividend increases that includes names like 3M (NYSE:MMM), Coca-Cola (NYSE:KO), Emerson Electric (NYSE:EMR), and direct competitor Procter & Gamble (NYSE:PG).

Those dividend hikes averaged around 10% a year over the past decade, which is more than enough to trump the 3% or so historical average for inflation. That said, the increases have been smaller of late, with the last hike in March amounting to only 2.5% or so. This isn’t too surprising since revenues have been pretty stagnant, or worse, for three or four years. And while share buybacks have helped to keep earnings up, 2015 was a tough year because of one-time charges related to the troubles in Venezuela that pulled $1.42, after tax, out of earnings. But, like the top line, the bottom line hasn’t exactly been on a robust upswing in recent years.

All time high

Which is what makes the stock price so interesting. Colgate-Palmolive’s stock is hitting all-time highs despite some notable questions that have shown up in its business performance. There’s nothing in the business that says run for the hills, it’s just been a bit sluggish of late. Nothing new for a company that’s been around as long as Colgate-Palmolive. But, faced with this backdrop, why are investors pushing the stock price up? The reason is likely that investors are seeking out safe income-paying stocks in today’s brutally low yield world. And on that score, a 50-plus year record of annual dividend increases sure makes Colgate-Palmolive stand out.

However, there are risks here. First and foremost is that the underlying performance isn’t as impressive as the stock price gains. But there’s more. For example, the trailing Price to Earnings ratio is way beyond the company’s five-year average, distorted by the one-time charges in 2015. That said, the forward P/E, which uses often overly-positive analyst estimates, is nearly 15% above the five-year average, too.

Price to sales is even more out of whack, about 35% above the norm. You can attribute some of this to currency volatility and Venezuela, but that’s a huge difference! Price to cash flow is 20% over the recent norm as well, with dividend yield slightly below where it has been of late.

Interestingly, the dividend yield is the only one of these metrics that suggests that Colgate-Palmolive might be close to fairly valued. But once you couple that with the all-time high share price and other valuation metrics, the notion that it’s fairly valued starts to look suspect. And then consider that the 2.1% or so yield isn’t really all that much higher than the broader market, and Colgate-Palmolive starts to look a lot less compelling.

Valuation risk, not company risk

That’s the important takeaway. Colgate-Palmolive’s stock looks like it’s pricey. At best it might be fairly valued, though not in my eyes. It’s certainly a rock solid company with a great corporate history. I wouldn’t expect it to go out of business even in the most adverse market conditions. But that’s not the risk investors are facing today with Colgate-Palmolive. The risk is in paying too much money for the shares.

It’s the same story throughout the market, to be honest. But if all you see is the reliable dividend-paying company behind the stock price, you might end up regretting the decision to buy in at today’s prices. If you are an income investor, don’t forget about valuation in your search for reliable dividends. What you pay will matter a great deal at some point in the not too distant future. And Colgate-Palmolive is a perfect case in point for the risk of missing the valuation for the dividends.

Fuente: Seeking Alpha


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