Looking for a dividend stock that will make you smile?
) has been whitening and brightening portfolios for decades.
Over the past 20 years, the maker of oral care products, dish soap,
deodorant, and pet food has posted a total return, including
reinvested dividends, of 12.8% annually. That handily beats the
8.2% annual total return for the S&P 500 over the same period.
Past performance is no guarantee of future results, of course. And
Colgate's stock isn't cheap: It trades at a multiple of 22.6 times
2012 earnings (excluding one-time items). But for long-term
dividend investors, the global consumer products maker still has a
lot going for it.
Here are five reasons to like Colgate's stock.
1. It's a Dividend Machine.
The New York-based company has been paying dividends uninterrupted
since 1895, and it has raised its dividend in each of the past 50
That includes a 10% hike in March, when the company also announced
a two-for-one stock split, effective May 15. Stock splits by
themselves don't add any value, but they often signal that a
company is performing well. Likewise, dividend increases are a sign
Colgate's dividend payout ratio is a comfortable 47% of earnings,
and the company spins out ample cash to reinvest in its operations
and pay dividends. The yield of 2.2% isn't huge, but "given
Colgate's stable cash flow, we expect the dividend to continually
increase over time," said Jack Russo, an analyst with Edward Jones.
He expects the dividend to grow at about 7% annually over the next
2. It's a Play on Emerging Markets.
Colgate generates nearly 80% of its revenue outside the United
States, and about 50% from emerging markets. That's a good thing,
because penetration of oral care products is much lower in
developing countries, which means the long-term growth
opportunities there are higher.
"For example, per-capita consumption of toothpaste in the US is
about 550 grams per year. In China, this figure is about 250 grams,
and in India it is about 125 grams," Stephen Boland, an analyst
with Odlum Brown, said in a report. "Colgate is very deeply
entrenched in many of the key emerging markets thanks to its early
global expansion and its strong market share position."
3. Its Balance Sheet Is Solid.
Standard & Poor's rates Colgate's debt at AA-minus, or "very
strong," and the company can easily cover its interest obligations,
What's more, profit margins have grown over the past 20 years as
Colgate cut costs and reinvested the savings to increase sales and
market share. Russo expects sales to increase by about 5% annually
over the next five years, with earnings per share climbing by about
4. Its Brands Are Strong.
Colgate controls about 45% of the global toothpaste market, and
sells about one out of every three manual toothbrushes, but there's
more to the company than teeth. Its stable of well-known brands
includes Speed Stick, Irish Spring, Palmolive, Softsoap, Fleecy,
Ajax, and Science Diet.
Strong brands give the company pricing power, and the focus on
consumer staples makes the stock a defensive holding during
economic downturns. With annual sales of more than $17 billion and
a presence in about 200 countries, it also provides excellent
5. Earnings Usually Meet-or Beat-Estimates.
Colgate, which is scheduled to release first-quarter results on
Thursday, has matched analyst estimates in six of the past eight
quarters, and exceeded estimates twice.
For the first quarter, analysts expect earnings of $1.32 per share,
up from $1.24 a year earlier. The predictability of quarterly
earnings provides some comfort to investors.
That said, Colgate isn't a slam dunk. It faces risks including
currency fluctuations, rising input costs, and competition from
Procter & Gamble
), and others.
Perhaps the biggest concern is the stock's valuation. Colgate's P/E
multiple has been climbing steadily over the past few years, and at
22.6 is higher than its ten-year average of 20.2. The rich
valuation explains why most analysts rate the stock a "hold." The
danger with high P/E stocks is that, if growth slows or results
disappoint, the shares could get hammered.
Patient investors could wait for such an opportunity before jumping
in. Then again, given Colgate's track record, the stock could
continue rising from current levels. That would certainly make
Editor's Note: This article was written by John Heinzl of the
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