Colgate-Palmolive: I Like The Toothpaste, Not The Stock (NYSE:CL)

Charlie Munger is one of the best known investors in the world. He’s been the right-hand man to Warren Buffett for decades. He argues that you should only buy stock in companies you understand. At times, I’ve invested in companies that sell products I use. I’ve read some investing recommendations to buy stock and use dividends to pay for what you purchase from a company. For example, if I use Verizon (VZ) or AT&T (T) as my cell phone provider, it’s possible to purchase enough stock to earn enough dividends to pay for the purchases you make.

One company that sells a product I use every day is Colgate-Palmolive (NYSE:CL). I like Colgate’s Total toothpaste when compared to some of its major competitors. I probably purchase somewhere in the neighborhood of $25-$50 worth of toothpaste a year for my household. Therefore, I could purchase about 25 shares, give or take, and receive enough in dividends to reimburse me for my toothpaste each year. However, given recent history, I have to wonder if this is a good move at this time.

The Power of Dividends

One of the most passive forms of passive income is dividend income. While it’s true that it’s difficult to get passive income without laboring for it initially, once you have enough money to buy your first share of a dividend-paying stock or fund, you can start building your dividend snowball.

After you purchase the first share or basket of shares, you’re far, many thousands, from having enough capital to retire on passive income. That means it’s back to the salt mine (or wherever you happen to work). On the next payday, hopefully, you’ll have enough available to make another investment, which adds to the amount of passive income you can receive. Over time, the dividends can buy more shares on their own, and those shares will start to earn dividends which can then buy more shares. It’s a virtuous cycle, and eventually, the dividends might provide enough passive income to pay for a household’s expenses altogether.

I’m always interested in companies and funds that pay dividends. I’m looking to build up a portfolio that can offset some (probably not all) of my income as I get closer to retirement. I frequently look into companies I use, like Colgate, for possible investments.

Colgate’s Brands and History

Colgate-Palmolive has a long, successful history. The company has been around for more than two centuries, and it has a stable of popular brands that include its namesake toothpaste and dish soap. It also offers products that range from deodorant (Teen Spirit) to pet food (Hill’s).

There are likely few households in America and many foreign countries that have avoided the use of one of CL’s brands over the long run. In recent years, Colgate’s toothpaste has been more popular among American consumers than its main competitor, Procter & Gamble’s (PG) Crest.

However, despite the company’s strong track record, I am not likely to buy any at present.

Financial Considerations

As an investor who is interested in building a stream of passive income through dividends, one of the first things I look at is a company’s dividend history. Colgate’s is strong. Not only does it pay a dividend, CL has increased its dividend for 59 years straight. That dates back to the Kennedy administration and before hippies were even a thing.

The current quarterly payment of $0.47 per share gives a yield of 2.42% (as of mid-day on 12/21/22). This yield beats that of the overall S&P 500, which is currently at 1.7% when looking at Vanguard’s fund (VOO) that tracks the index. However, Colgate’s yield is not huge. When getting a relatively low starting yield, I’m interested to see how fast it has grown in recent years. Despite its long dividend growth history, in the past five years, CL’s dividend has only grown at a 3.19% annual clip. Over the same five years, the company’s stock has only increased in value by 4.64%. VOO, by way of comparison has seen a 43.71% increase in its share price. This shows that Colgate has shown little growth in either the share price or the dividend payment in recent years.

Regarding the dividend payout percentage, which admittedly can vary based upon one-time events or accounting adjustments, Colgate has increased its payout ratio from 47.25% in 2012 to 88.28% for the past 12 months, although full numbers for 2022 are not yet available. The last annual report, released in December 2021, indicated a payout percentage of 77.52%. This relatively high payout percentage likely indicates that future dividend increases will be somewhat limited, although that is not out of line with the company’s recent dividend growth history.

Revenue numbers had gone up a bit in the past few years after a recent low of $15.195 billion in 2016. However, when comparing current revenues with the numbers from a decade ago, that number is basically flat. In December 2012, CL reported annual revenue of $17.085 billion. Ten years later, that number was still only $17.421. Given the recent runup in inflation, it’s likely this number could grow a bit over the short term, but Colgate-Palmolive is likely to experience higher costs, as well.

Regarding CL’s income numbers, both net income and EPS have failed to grow over the past decade. The diluted EPS between 2012 and 2021 actually dropped from $2.57 to $2.55 (although this number was $3.14 in 2020, the highest it was over the decade). This lack of EPS growth was despite the company buying back about 107 million shares over the past decade, which was about 11.2% of the total shares initially outstanding. Additionally, net income has dropped from $2.472 billion to $2.166 billion over the past decade. Only 2020 had a net income that exceeded the number posted in 2012.

The current P/E ratio on CL’s stock is 26.17, which is pretty high. Given the fact that this is not a company that’s likely to achieve rapid growth because of its market saturation, the valuation appears to be high.

Conclusion

Colgate is a great consumer staple company that’s likely to perform relatively well in a recession. People need to brush their teeth regardless of what’s going on in the broader economy. However, it’s likely that even consumer staple stocks would get hit in a deep recession, which could provide a better valuation. Also, there are better options for higher yields that have similar or better dividend growth records in recent years. With slow or nonexistent revenue and income growth, the dividend is not likely to increase rapidly in the near term. Therefore, Colgate-Palmolive is probably not going to show up on my list of stocks to buy in the near term, although I would likely hold onto it if I currently owned it.