Analyzing Colgate-Palmolive’s Dividend Growth Potential

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Recap from November’s Picks

Overall, 10 out of 30 dividend growth stocks outperformed the S&P 500 from November 23, 2021 to December 27, 2021. On a value return basis, the Dividend Growth Stocks model portfolio (+0.5%) outperformed the S&P 500 (+1.9%). ) up 1.4%, and the model portfolio by total return (+0.7%) outperformed the S&P 500 (+2.3%) by 1.6%, with the best-performing stock up 12%.

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The methodology for this model portfolio mimics an all-cap blend style with a focus on dividend growth. Selected stocks earn an attractive or very attractive rating, generate positive free cash flow (FCF) and economic earnings, provide a current dividend yield >1%, and have a 5+ year track record of consistent dividend growth. This model portfolio is designed for investors who focus more on long-term capital appreciation than current income, but still appreciate the power of dividends, especially growing dividends.

Select stocks from December: Colgate-Palmolive Company
chlorine

Colgate-Palmolive Company (CL) is a featured stock from the December Dividend Growth Stocks Model Portfolio. I made Colgate-Palmolive Long Idea in June 2018. Since then, the stock is up 34% while the S&P 500 is up 78%. Despite its poor performance, the stock still offers attractive risk/reward. Check out my latest report on Colgate-Palmolive here.

Colgate-Palmolive’s revenue grew 1% annually over the past five years and net operating profit after tax (NOPAT) grew 4% annually. The firm’s NOPAT margin increased from 16% in 2015 to 18% over a twelve-month (TTM) period, while the firm’s economic earnings increased from $2.0 billion to $2.5 billion in the same time period.

Figure 1: Colgate-Palmolive’s NOPAT and Revenue since 2015

FCF exceeds dividend by a wide margin

Colgate-Palmolive has increased its dividend for 59 consecutive years, The firm increased its regular dividend from $1.55/share in 2016 to $1.75/share in 2020, 3% compounded annually. The current quarterly dividend, when done annually, equals $1.80/share and provides a 2.1% dividend yield.

More importantly, Colgate-Palmolive’s strong free cash flow (FCF) is more than offset by the firm’s rising dividend payout. Colgate-Palmolive’s cumulative $11.7 billion (16% of its current market cap) in FCF is roughly 1.5 times the dividends paid from 2016 to 2020. $1.7 billion in dividends. Figure 2 also shows that Colgate-Palmolive’s FCF has significantly exceeded its dividend payout in four of the past five years.

Figure 2: Free Cash Flow vs. Regular Dividend Payment

Companies with FCF above dividend payouts offer high quality dividend growth opportunities because I know the firm generates cash to support higher dividends. On the other hand, a company’s dividend where the FCF falls short of dividend payments over time cannot be relied upon to increase or maintain its dividend due to insufficient free cash flow.

Colgate-Palmolive Has Upside Potential

At its current price of $85/share, CL has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means that the market expects Colgate-Palmolive’s NOPAT to drop by 10% permanently. This expectation appears overly pessimistic for a firm that has compounded NOPAT at 5% per annum over the past two decades.

Even though Colgate-Palmolive maintains a TTM NOPAT margin of 18% (down from the five-year average of 19%) and compounded NOPAT just 2% annually for the next decade, the stock is worth $105/share today — up 24%. See the math behind the reverse DCF scenario,

Should the firm raise NOPAT further in line with the historical growth rate, the stock rises even more. Add in Colgate-Palmolive’s 2.1% dividend yield and history of dividend growth, and it’s clear why this stock belongs in December’s Dividend Growth Stocks Model Portfolio.

Important Details Found in Financial Filings by MyFirm’s Robo-Analyst Technology

Below are details about the adjustments I made based on the robo-analyst findings in Colgate-Palmolive’s 10-Q and 10-K:

Income Statement: I earned $601 million in adjustments with the net effect of removing $370 million in non-operating expenses (2% of revenue). View all adjustments made to Colgate-Palmolive’s income statement Here,

Balance Sheet: I adjusted $7.2 billion to calculate invested capital with a net increase of $5.4 billion. The most notable adjustment to other comprehensive income was $4.3 billion (38% of reported net assets). View all adjustments in Colgate-Palmolive’s balance sheet Here,

Valuation: I earned $12.2 billion in adjustments, with the net effect of a reduction of $11.6 billion in shareholder value. In addition to total debt, the most notable adjustment to shareholder value was $1.9 billion in underfunded pensions. This adjustment represents 3% of Colgate-Palmolive’s market value. See all adjustments to Colgate-Palmolive ratings Here,

Disclosure: David Trainor, Kyle Guske II and Matt Schuler receive no compensation for writing about any specific stock, genre, or topic.

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