Colgate-Palmolive (NYSE:CL) is a Combination of Undervalued Cash Flows and Sustainable Dividends

Finding good and stable dividend stocks can give investors defensive properties to their portfolio. When looking for an income stock, we are scanning for something that is going to sell product on the long-term, and has enough pricing power to sustain a customer base across market cycles. For those reasons, today we are going to analyze the popular Colgate-Palmolive Company (NYSE:CL) from the perspective of a dividend stock.

In a dividend stock we want to see:

• Reliability of payments - the company has a long track record of stable dividend payments.
• A sustainable coverage ratio - the company must be able to afford dividends from income, and not from loans or selling assets.
• A stable company with future growth potential - we wish to avoid declining companies, or products that consumers may not want in the future.
• A suitable place in our portfolio for the stock - properly classify the reason why we want this stock. Is it to shield ourselves from losses, or do we expect it to grow our portfolio?

Great, now that we know what we are looking at, let's jump to the analysis.

Colgate-Palmolive operates through Oral, Personal and Home Care, and Pet Nutrition. Products include toothpaste, toothbrushes, mouthwash, soaps, shampoos, conditioners, deodorants, skin products, detergents, cleaners, etc. 

The company's product portfolio is characterized by essential consumer products that are used on a daily basis. The company has been continuously investing in the power of their brand, and this has resulted in high preference for, and recognition of Colgate-Palmolive's products. This is central, as it stabilizes the market share for the products that the company has currently implemented, as well as reducing the cost of introducing future products under their brand.

We can also see this expressed in the company's return on capital (employed), where they have a high ROCE of 33%!

This means that the company is making productive decisions and gaining efficient returns on the money invested in projects. For investors, this shows that the company is creating value and has a product that consumers prefer.

Colgate-Palmolive Dividend Analysis

The current dividend yield of Colgate-Palmolive is 2.4%. On the face of it, this might seem low, but the long-term stability provides investors with some protection against volatile market downturns. Additionally, the company seems to be 38% undervalued on a fundamental basis, indicating the possible upside potential for the stock price.

In aggregate, for investors, this means that the stock is expected to produce a total return between 12% (dividends only) and 50% (value return + dividends) in the next 5 years. Conversely, the past 5-year total stock return (including dividends) is 19.8%. Our model estimates that the cash flows of Colgate-Palmolive are undervalued, hence where a large part of the upside comes from.

The company also bought back stock during the year, equivalent to approximately 2.1% of the company's market capitalization at the time.

Explore this interactive chart for our latest analysis on Colgate-Palmolive!

Looking historically, dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 2.8% a year for the past five years.

Turning to the future, our analyst estimates show that the company's EPS are expected to grow by 4.8% annually, which should outpace historical growth.

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax.

Looking at the data, we can see that 57% of Colgate-Palmolive's profits were paid out as dividends in the last 12 months. This is a healthy payout ratio, and shows that the company can finance dividends from profits.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. The company paid out 58% of its free cash flow.

Get our latest analysis on Colgate-Palmolive's financial position here.

Conclusion

A good dividend stock is a balance between a stable and growing profitable company, with a payout ratio that does not jeopardise the future of the company. Colgate-Palmolive has a low yield, but high product demand, and can be a great addition to a defensive portfolio.

The company is also significantly undervalued, which means that investors may cycle into buying more of the stock, especially if growth stocks become even more risky in the future.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

What are the risks and opportunities for Colgate-Palmolive?

NYSE:CL

Colgate-Palmolive

Colgate-Palmolive Company, together with its subsidiaries, manufactures and sells consumer products worldwide.Show more

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Rewards

• Earnings are forecast to grow 15.43% per year

Risks

• Large one-off items impacting financial results

• Has a high level of debt

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.