Colgate-Palmolive: This Dividend King Continues to Sparkle

We are in the middle of quarterly earnings season once again. In the consumer staples industry, investors should pay particular attention to profit margins. Consumer product manufacturers are particularly challenged right now from rising raw materials costs. Fortunately, the highest-quality companies continue to reap the benefits of their strong brands, which gives them the ability to pass rising costs on to consumers. Colgate-Palmolive recently delivered a better-than-expected earnings report. The company continues to exercise pricing power, particularly in the high-growth emerging markets where it enjoys a dominant position. Colgate-Palmolive is a time-tested dividend growth stock. The company has paid uninterrupted dividends on its common stock since 1895. It is also a Dividend King, having raised its dividend for over 50 years in a row. The strong quarterly earnings report was the latest sign that the company is firing on all cylinders. Quarterly Earnings Review For the first quarter, Colgate-Palmolive reported revenue of $3.9 billion, which narrowly beat analyst estimates by $20 million. Revenue declined 3% on a year-over-year basis, but unfavorable currency exchange wiped six percentage points off the revenue total. Organic revenue, which excludes foreign exchange, increased 3% due to 1% higher shipment volumes and 2% growth in pricing. Positive organic revenue growth is a good sign that the company is fundamentally healthy. Rising shipment volumes indicates Colgate-Palmolive's product line continues to enjoy popularity with consumers. At the same time, higher pricing signals the company's ability to pass on higher costs to consumers without sacrificing demand. Still, margins remained under pressure last quarter. Despite the company's efforts to raise prices, gross profit margin was 59.2%, a decrease of 110 basis points from the first quarter a year ago. Higher raw materials and packaging costs were the primary causes of Colgate-Palmolive's margin erosion last quarter. Fortunately, adjusted earnings per share of $0.67 also beat expectations, by $0.01. Colgate-Palmolive managed to beat consensus estimates on both the top and bottom line, thanks largely to the strength of its core brands. North America continued to be solid, with 3.5% organic revenue growth last quarter. While the near-term remains challenging for Colgate-Palmolive, due to significant headwinds from currency and rising cost inflation, coming off the first quarter beat, the company's long-term outlook remains highly positive, thanks to its industry leadership across several growth markets. Growth Prospects Colgate-Palmolive's most important growth catalyst is its brand leadership, which will be a particular advantage in the emerging markets, which represent a massive long-term growth opportunity. At the end of 2018, Colgate-Palmolive held over 40% share of the worldwide toothpaste market. It had greater market share than its three largest competitors combined. This is a huge opportunity, because the emerging markets are extremely attractive for growth. According to Colgate-Palmolive, 68% of the population in markets where it operates brush less than once per day. As a result, rising toothpaste usage combined with increased market penetration should fuel continued growth in emerging economies for many years. Last quarter, the company grew organic revenue by 6% in Latin America, and 7% in Africa. Together, these two geographic regions represent nearly 30% of total company sales. Another growth catalyst for Colgate-Palmolive is its pet products segment. Under the Hill's family of brands, Colgate-Palmolive has a booming pet products business that allows it to tap into a major growth theme. Put simply, people love their pets -- and are willing to spend a lot to keep them happy and healthy. Colgate-Palmolive generated 6% organic sales growth from its Hill's Pet Nutrition segment last quarter, which represents approximately 15% of total sales. According to the American Pet Products Association, spending on pets increased 4% in the U.S. last year to another annual record. Spending on pets is now a $72+ billion market, and Colgate-Palmolive owns one of the biggest brands in the industry. There should be plenty of growth potential left for the company in this area, as pet spending is expected to increase another 4% in 2019, to over $75 billion. Strong Brands Fuel Dividend Growth Inflationary pressures are usually transitory, but Colgate-Palmolive's brand strength is a constant. The company's competitive advantages and dominant position in its core product categories fuels its impressive dividend growth. It has paid uninterrupted dividends for over a century. It has also increased its dividend each year for the past 56 years in a row, including a 2.4% hike in March. CL stock has a current yield of 2.4%, which is well above the 1.9% average dividend yield of the S&P 500 Index. Colgate-Palmolive should have little trouble continuing to increase its dividend each year moving forward. Based on expected EPS of $2.83 for 2019, the company has a forward dividend payout ratio of 61%. This is a healthy payout ratio, leaving plenty of room for future dividend raises. The Bottom Line As always, quarterly earnings reports give investors the opportunity to separate the best-performing companies from those that are struggling. The consumer staples industry is stressed right now from rising input costs, but the best-in-class operators have the ability to cut costs and raise prices when times are tough. Colgate-Palmolive stock is up 21% year to date, outperforming the S&P 500 Index by more than five percentage points so far in 2019. CL has an above-average dividend yield that beats the index, and a long history of dividend increases, making it a strong stock pick for dividend growth investors.

Colgate-Palmolive: This Dividend King Continues to Sparkle

CL has increased its dividend 56 years in a row, including a 2.4% hike in March.

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