You know interest rates are low when your most conservative
customers are looking to move out of the safety that certificate
ofdeposits (CDs ) provide and into dividend-payingstocks , which
provide higher yields, but may not be completely risk-free.
The past few years there has been a "buzz" surrounding
dividend-paying stocks, and rightly so.
Consider the average retiree who needs more income, for example.
It's possible to choose the negligible 1-2% yields Treasurybonds or
CDs areoffering , but there's alot more assets thatoffer higher
yields right now. In fact, StreetAuthority Co-Founder Paul Tracy
has already gone on record saying thatmarket 's returns in the next
decadewill come from dividends. He's convinced thatshares of
companies that are tapping into their hugecash balances, or "
," are the way to go.
It's not hard to see why so many investors these days are
finding their answer in dividend-paying stocks.
In addition, if yourinvestment goals include playing defense
against an unstable market, then dividend-paying stocks can provide
the safety and dependability you seek. Thecash flow from dividends
may also protect a company's share price during volatile times. The
goal is to protect against losses in a down market and take
advantage of the markets when they rise.
When I look for a "stock , I look for stable companies in stable
industries that typically pay at least a 2%dividend .
And I just found a household stock that has raised its dividend
each of the past 49 years. Better yet, I don't see the trend
The story behind this stock is nothing but extraordinary. After
all, who would imagine, a mundane household item such as toothpaste
through thick and thin?
This leading global consumer products company has been around
for more than 200 years and is tightly focused on
internationally-recognized brands such as Colgate, Palmolive, Ajax,
Suavitel, and Hill's Science Diet and Hill's Prescription Diet to
name a few.
But despite strong brands in its portfolio, Colgate is best
known as a global leader in oral care, with worldwidemarket share
of roughly 45%. Its deep and loyal customer base, which has come to
know and trust Colgate from generation to generation, has somewhat
insulated the stock from major downturns.
Take a look at Colgate's impressive run, despite the
GreatRecession of 2008...
In a slow-growingeconomy , toothpaste has proven to be one of
the most attractive and stable products, because of its impressive
margins, low private-label penetration rates and high levels of
All this brand loyalty comes from Colgate's 40-year history of
deep and far-reaching partnerships with dentists. This has also
built a firm foundation the company's presence in developing
markets. Colgate's main driver has been education and awareness
about oral care, which has helped the company gain leading market
share of its core brands in this segment.
And management has made a major commitment to return excess cash
to shareholders. As I've mentioned before, Colgate has raised its
dividend payment every year for the past 49 years.
The stock is very sound from a financial perspective also. Its
"AA"credit rating indicates close to zerodefault risk . Colgate
generates very healthy cash flow from operations and uses debt
efficiently. Its debt/capital ratio has averaged 0.6 during the
past five years, while adjustedEBITDA covered interest expense an
impressive 47 times.
On Jan. 31, the company announced 2012 fourth-quarterearnings of
$1.41 per share, relatively in-line with the consensus forecast of
$1.40. Consensus for this year's first quarter is running around
$1.36 per share, however. Demand for Colgate's products and
services have been strong, growing roughly 5% to $4.20 billion in
the fourth quarter of 2012, compared with the year-ago period.
Colgate appears attractively valued with its trailing 12-month
price-to-earnings (P/E ) ratio at almost 22 compared to the peer
group's P/E of almost 26. Return on assets is 19.86, significantly
higher than the industry average of 10.70. It has had positive
operating cash flow each of the past three years, with an
impressive return onequity of 95.6% compared to an average of 34.7%
for the industry.
Risks to Consider:
Because Colgate operates in a limited number of product
categories, this somewhat limits new product development. In
addition, the extensive use of its brand products can diminish the
visibility of the company's innovation efforts. Additionally input
costinflation can wreak havoc on management's long-term 60%gross
margin target. Competition from companies such as
Proctor & Gamble (
hasput a small dent in Colgate's market share.
Action to Take -->
Having said that, Colgate is the industry leader and I do not see
this changing any time soon. The positive fundamental factors for
Colgate outweigh the negatives by a significantmargin .
Buy Colgate-Palmolive up to $120 a share. With a 2.3%yield ,
this is an attractive lower-risk stock that has the ability to
produce inflation-protected income. I see this stock increasing by
8-10% during the next 12 months.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.