Colgate Palmolive (NYSE: CL) is one of the best-known consumer products companies in the United States. Products such as toothpaste and dish soap remain in constant demand, regardless of the economic cycle. This stability has long made Colgate an attractive investment company. for conservative investors.
And while Colgate’s earnings have been healthy — the company has raised its annual dividend for 59 years in a row — growth has been hard to come by in recent years. In 2012, Colgate generated $17.1 billion in revenue. Last year, it attracted $17.4 billion, representing an annualized growth rate of just 0.4% over the past decade.
Predictably, with a rate of revenue growth that has kept pace with inflation, Colgate’s stock price hasn’t done much either:
The shares were essentially flat between 2014 and 2020. Colgate finally hit new highs in late 2020 as investors were newly drawn to its recession-proof stablecoins. However, Colgate has stagnated again now that consumer staples names have plunged amid the historic inflationary wave. For an investor who bought the stock five years ago, there has been virtually no return outside of the dividend.
And to be fair, this lack of stock price performance is understandable. It’s not like earnings per share did much either:
Colgate managed to grow earnings from around $2.50 per share per year in the 2010s to over $3 per share last year. However, with the onset of the current inflationary issues that have destroyed supply chains in the commodity industry, Colgate’s profits have fallen again in 2022 and are back to normal levels for the company before the pandemic. .
Looking for a slight pick-up in growth
The 2010s could effectively be considered a lost decade for Colgate. The company has had a variety of things go wrong. These include some pressure on margins, very weak results in emerging markets and a difficult pricing environment.
Longer term, however, it’s hard to believe that Colgate’s revenue will only grow 0.4% indefinitely. On the one hand, the return of inflation has given Colgate much greater leeway to raise prices significantly.
Currently, this is not reflected in profits, as Colgate has to pay significantly more for inputs, labor, logistics, etc. But at some point, inflationary pressures will ease, while price hikes on consumer goods tend to be permanent. Grassroots businesses are big beneficiaries of the so-called ratchet effect; prices rise rapidly during periods of inflation, but are rarely reduced once the shock is over.
On the other hand, emerging markets are unlikely to perform as badly in the 2020s as they did in the 2010s. Latin America, in particular, has suffered from extremely difficult economic conditions and local currencies. low over the past decade. This was bad news for Colgate because it earns less (in dollars) when it converts its foreign earnings back into dollars. Now, however, with soaring prices for oil, metals and agricultural products, major emerging markets such as Brazil should benefit from stronger economic results, and therefore offer higher profitability for Colgate.
Finally, Colgate seems to be taking a more aggressive stance lately. Guidance has increased to some extent in terms of organic growth, and there is a sense that management is also considering M&A opportunities more. After a decade of lackluster results, I expect management to try to drum up support from increasingly frustrated shareholders.
Analysts predict a significant increase in Colgate’s earnings over the next three years:
Do I think Colgate will hit $3.64 in 2024? In my opinion, this seems quite ambitious. We expect strong margin improvement to approach double-digit EPS growth in 2023 and 2024 with revenue growth below 4%. If the company can meet analyst estimates, however, Colgate would be a pretty decent buy at today’s price. Even if earnings are closer to, say, $3.30 in 2024, I think stocks are still fairly valued today.
Reopening of Venezuela: A Potential Positive Catalyst
Another interesting angle for Colgate is that it was once a major player in the Venezuelan consumer products market. Colgate has a massive share of toothpaste in Latin America, and Venezuela – with its 30 million people – is a big market. Colgate generated at least 5% of its annual revenue and profits in Venezuela before the mid-2010s, when the Venezuelan economy collapsed. Since that time, however, the local currency has become effectively worthless and foreign companies such as Colgate have been unable to operate profitably in this country.
However, change may finally be coming. The Biden administration has signaled some tentative steps toward warming ties with Venezuela.
To this end, the New York Post reported that:
“The Biden administration on Tuesday [May 17] took a step towards easing sanctions against Venezuela’s socialist government – just a day after lifting financial, travel and migration rules for Cuba.
The United States will allow Chevron to discuss its future work with Venezuelan state oil company PDVSA and lift sanctions against Carlos Malpica-Flores, a former PDVSA executive and relative of Venezuelan strongman Nicolas Maduro.”
I must stress that these are minor improvements in relations. This essentially gives Chevron (CVX) a chance to talk to the Venezuelan oil industry. It does not directly authorize any process for Chevron or others to help increase Venezuela’s oil production or provide more direct revenue to the Maduro government. That said, US policy toward Venezuela has been one of complete isolation for many years. The conflict in Ukraine, however, could force the United States to allow Venezuelan oil back into the global supply chain.
This, in turn, would likely have positive ramifications for Colgate. Colgate was one of the hardest-hit US companies when the Venezuelan economy collapsed a decade ago. And for a company that has seen virtually no revenue growth in recent years, if Venezuela returned to the capitalist sphere, it could lead to an immediate increase of at least 5% in overall annual revenue and profits. from Colgate.
Conclusion of Colgate
I view Colgate as a kind of “bond replacement” type equity for a conservative income-oriented investor. The company sells an almost fixed quantity of toothpaste and other cleaning and hygiene products each year. Rain or shine, people brush their teeth. Growth will be modest at best, but it’s really hard to imagine sales dropping much either. Colgate has one of the most stable low volatility cash flows you will find in the stock market today.
Is the return high enough to justify an investment? If you expect returns above the S&P 500 by now, maybe not. If Colgate returns to $3.00 per share on a future basis and stabilizes there, we are looking at 25x earnings at $75. That’s a 4% return on profits. If the company grows 2% per year on top of that, you’ll get something like 6% annualized returns with a dividend yield starting at 2.5%.
Would I rather own Colgate stocks for their 2.5% dividend yield and 6% total returns than fixed income? Absolutely. The downside risk in a stock like Colgate is minimal. It’s hard to imagine a more recession-proof company than Colgate. On the other hand, shy of something out of left field, like a transformative M&A deal, it’s hard to see Colgate seriously beat upside expectations either.
If a starting dividend yield of 2.5% with modest annual dividend increases and limited share price appreciation is enough to meet your needs, then CL stock will do well from here. Personally, I support owning “bond-like” stocks since bond yields themselves are too low to warrant my interest at current levels.
That said, I see other consumer staples where you’re more likely to get, call it, 3-6% annual earnings growth from a similar starting P/E ratio.
But it’s hard to top Colgate in its sheer defensive nature. A 4% return on profits from this type of ultra-safe blue chip is sufficient. Given how slow CL stock tends to move, this year’s decline from $84 to $75 has significantly improved the stock’s return outlook. That said, for me to invest my own money in it, I would either like to see a stock price in the $60s or more evidence that Colgate can earn earnings closer to $3.50 per share. An AP/E closer to 20 (5% earnings yield) would make Colgate stock a more attractive offer.