Throughout its 218 years of existence, Colgate-Palmolive has weathered several recessions, depressions, market crashes, wars, and other significant events since its establishment in 1806. Despite this, the company is thriving and remains the global market leader in toothpaste sales. Not many companies have a history like Colgate-Palmolive, which suggests that it could be a secure investment option during economic headwinds. In this analysis, I will investigate whether now is the right time to purchase Colgate-Palmolive.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Colgate-Palmolive or any of its direct competitors. If you are interested in copying my portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal interest in Colgate-Palmolive, which means it should not be difficult to maintain an unbiased analysis. If you want to purchase shares or fractional shares in Colgate-Palmolive, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
Colgate-Palmolive is an American company that was founded in New York City in 1806. It started as a starch, soap, and candle factory until it introduced its first toothpaste in 1873. It merged with Palmolive in 1928 and has been known as Colgate-Palmolive ever since. Colgate-Palmolive operates in four segments: Oral Care, which accounts for 42% of net sales, Pet Nutrition (22% of net sales), Personal Care (19% of net sales), and Home Care (17% of net sales). Colgate owns the following brands: Colgate, Darlie, Elmex, Hello, Meridol, Sorriso, Tom's of Maine, Irish Spring, Palmolive, Protex, Sanex, Softsoap, Lady Speed Stick, Speed Stick, EltaMD, Filorga, PCA SKIN, Ajax, Axion, Fabuloso, Murphy, Suavitel, and Soupline in oral care, personal care, and home care, while also owning Hill's in pet nutrition. They sell their products worldwide, with sales well diversified across different regions. Only 20% of net sales are in North America, while Latin America is its largest segment, accounting for 24% of their sales. Colgate-Palmolive is the global market leader in toothpaste, manual toothbrushes, and liquid hand soap. Additionally, it holds significant market shares in mouthwash, bar soap, liquid body cleansing, liquid fabric conditioners, and hand dishwashing. According to Kantar Brand Footprint 2023, globally, Colgate is the brand found in more households than any other, present in almost 700 million homes worldwide. This indicates that Colgate-Palmolive has a strong brand moat, with products that are trusted by consumers worldwide.
Management
The CEO is Noel Wallace. He first joined Colgate-Palmolive in 1987, where he held various positions until he became the CEO in 2019. It is difficult to find substantial information about Noel Wallace, making it challenging to evaluate him based on his performance as CEO. During his tenure, the company has faced challenges such as a pandemic and macroeconomic headwinds, which have made it difficult for any company to operate effectively. One thing I appreciate is Noel Wallace's extensive experience within the company. He has successfully advanced through the ranks by excelling in various positions. I also appreciate that he was previously the COO of Hill's Pet Nutrition, as it is the fastest-growing segment at Colgate-Palmolive. His expertise in the pet nutrition industry led him to acquire three dry pet food manufacturing plants from Red Collar Pet Foods to increase production, a decision I believe is wise. Employees seem to like him as well, as he has a CEO rating of 78 out of 100 at Comparably, which places him in the top 10% of similar-sized companies. This is impressive, especially when you consider what he had to go through in his first years as CEO. Overall, I have confidence in Noel Wallace due to his extensive experience in the company and industry, as well as his focus on the Pet Nutrition segment.
The Numbers
The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history where all figures exceed 10% annually. Colgate-Palmolive has consistently delivered a high Return on Invested Capital (ROIC) in the past ten years. There was only one year when Colgate-Palmolive had an ROIC below 20%, which was in 2022. This year was particularly challenging for most companies due to macroeconomic factors. While Colgate-Palmolive hasn't reached previous heights above 30% since 2020, I'm still encouraged by these numbers as few companies manage to deliver a Return on Invested Capital (ROIC) above 20% consistently.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it moving forward. As you are accustomed to seeing numbers in percentage form, I have decided to share both the actual numbers and the year-over-year percentage growth. Colgate-Palmolive's equity has dropped since 2014, which is our oldest benchmark. It is never pleasant to see a company experience a decrease in equity over a ten-year period. However, a company like Colgate-Palmolive frequently makes acquisitions and sells divisions. This makes me hesitant to place too much importance on equity growth. It is an encouraging sign that equity has been relatively consistent since 2020, reaching a higher level compared to the five years before.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Colgate-Palmolive has generated a positive free cash flow every year over the past decade. Free cash flow has been relatively consistent over the past ten years. It is encouraging that Colgate-Palmolive managed to deliver its second-highest free cash flow in 2023, the highest in the past decade. The levered free cash flow margin has not reached the pre-pandemic level, and the levered free cash flow has been lower in 2021, 2022, and 2023 compared to the five years before. I would like to see the levered free cash flow margin improve in the future. The free cash flow yield in 2023 is the highest since 2020 and above the ten-year average. This could indicate that the share isn't overly expensive, but we will revisit this later in the analysis.
Debt
Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. Upon calculating Colgate-Palmolive's financials, it is evident that the company has 3,57 years of earnings in debt. It is higher than I would like to see, but there is an explanation for the high debt. Colgate-Palmolive acquired some dry pet food manufacturing plants from Red Collar Pet Foods in 2022. The level of debt has decreased since 2022, which is a good sign. Therefore, debt isn't a major concern for me if I were to invest in Colgate-Palmolive.
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Risks
Based on my findings so far, I believe that Colgate-Palmolive is a reputable company. However, no investment is without risk, and Colgate-Palmolive also carries some risks. One risk is competition. In their annual report, Colgate-Palmolive mentions that they face vigorous competition, including from strong local competitors and other large multinational companies, some of which have greater resources than Colgate-Palmolive. The substantial growth in eCommerce has encouraged the entry of new competitors and business models. Some of these multinational competitors are Procter & Gamble and Unilever, both of which have more resources than Colgate-Palmolive. This means that they can spend more aggressively on advertising and promotional activities than Colgate-Palmolive, introduce competing products more quickly, and respond more effectively to business and economic conditions and changing consumer preferences. While smaller local competitors have the advantage of better understanding local consumers and not dealing with foreign exchange fluctuations.
Increasing dependence on major retailers in developed markets. Colgate-Palmolive's products are sold in a highly competitive global marketplace that has experienced increased trade concentration and the growing presence of large-format retailers, discounters, and eCommerce retailers. With the growing trend toward retail trade consolidation, the substantial growth of eCommerce, and the integration of traditional and digital operations at key retailers, Colgate-Palmolive is increasingly dependent on certain retailers. Some of these retailers have had and may continue to have greater bargaining strength than Colgate-Palmolive. They have used and may continue to use this leverage to demand higher trade discounts, allowances, slotting fees, or increased investment, including through display media, paid search, and co-op programs. These demands have led to, and could continue to lead to, reduced sales or profitability for Colgate-Palmolive in certain markets.
Macroeconomics. Unfavorable global economic conditions, such as a recession, economic slowdown, inflation, higher interest rates, and increased commodity costs, have adversely affected Colgate-Palmolive's business in the past and could continue to do so in the future, leading to declining revenues, profitability, and cash flows. During periods of economic uncertainty or unfavorable economic conditions, consumers may have less confidence, reduce discretionary spending, and alter their purchasing patterns by opting for "private label" or lower-priced product offerings. Furthermore, management has mentioned that while commodities overall are off their highs, they are still elevated compared to pre-COVID levels.
Reasons to invest
There are also potential benefits if you decide to invest in Colgate-Palmolive. There is a growth opportunity in the toothpaste industry. Most people may not think of toothpaste as a growth opportunity, but it may surprise you to learn that 68% of the world's population brushes their teeth less than once a day. As the middle class is growing around the world, one would expect that the frequency of people brushing their teeth would increase. Colgate-Palmolive is a global leader in both toothpaste and manual toothbrushes, with 44% of their net sales currently coming from emerging markets. If the economic trend of a growing middle class continues, it could be a great opportunity for Colgate-Palmolive. Furthermore, Colgate-Palmolive continues to gain market share globally, and management anticipates that this trend will lead to further growth in market share through 2024.
Growing in pet nutrition. Management believes that Hill's is underpenetrated as a brand. The Hill's brand is endorsed by veterinarians, and the management aims to prioritize advertising to enhance brand awareness of Hill's as a therapeutic nutrition brand. The reason for this is that only 5% of consumers are currently using therapeutic nutrition, whereas theoretically 80% should be using it. Management believes that there is ample opportunity to further increase market share for the Hill's brand as a uniquely differentiated product that emphasizes premium nutrition. Management will ensure that the veterinarian becomes a core part of the expansion strategy for the Hill's brand, as this would drive long-term sustainable profitability for the Hill's business.
A Safe Dividend. Colgate-Palmolive has paid a dividend for 129 consecutive years and has increased its dividend for 61 consecutive years. Hence, it seems like one of the safest dividends available. Management has expressed its intention to continue paying a healthy dividend and mentioned that, with the assistance of the board, it can develop a long-term dividend strategy. Colgate-Palmolive is also repurchasing shares and has decreased its shares outstanding by approximately 10% in the past ten years. Thus, Colgate-Palmolive returned $2,7 billion to shareholders through dividends and buybacks in 2023, and this amount is expected to increase in the future.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,02, which is from the year 2023. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 10% in the next five years, but I'm not as optimistic. Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on Colgate-Palmolive's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $18,86. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Colgate-Palmolive at a price of $9,43 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.745, and capital expenditures were 705. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 494 in our calculations. The tax provision was 937. We have 821,413 outstanding shares. Hence, the calculation will be as follows: (3.745 – 494 + 937) / 821,413 x 10 = $50,99 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Colgate-Palmolive's free cash flow per share at $3,69 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $40,51.
Conclusion
I believe that Colgate-Palmolive is an intriguing company that has the potential to thrive in any economic climate because they provide essential products to consumers. Colgate-Palmolive has a very strong brand presence, as it is found in more households globally than any other brand. I'm confident in the management as well. Colgate-Palmolive is facing some short-term challenges due to macroeconomic factors, but these are expected to improve over time. Competition will always pose a risk for a company operating in the same industry as Colgate-Palmolive. However, as a global market leader with over 200 years of experience, Colgate-Palmolive has established a strong presence in the market. Thus, I am confident that Colgate-Palmolive will continue to be competitive. One risk worth monitoring is the potential impact of increased trade concentration and the growing presence of large-format retailers, discounters, and eCommerce retailers on Colgate-Palmolive's business in the future. There are many things to like about Colgate-Palmolive as it still has plenty of growth potential in the toothpaste market, where they are a global leader, especially with the expanding middle classes worldwide. I really like the brand strategy for Hill's. If management succeeds in building brand awareness of Hill's as a therapeutic nutrition brand, it could drive long-term sustainable profitability for the Hill's business. Finally, Colgate-Palmolive offers one of the safest dividends in the market, making it an ideal choice for dividend investors. Overall, I like Colgate-Palmolive, as it is expected to deliver steady growth. Thus, I will buy Colgate-Palmolive shares if they reach the Ten Cap price of $50.
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