Under the Spotlight Wall St: Colgate-Palmolive (CL)

It’s fitting that Colgate-Palmolive ($CL) has the world’s leading toothpaste brand, given the smiles brought to investors’ faces by a 49% rally in the stock over the past year. 

And what has caused the flashing of pearly whites? Sparkling sales growth, despite cost-of-living pressures. It speaks to the indispensable nature of the US$88b company’s personal care and household brands, found in millions of homes around the world. 

From Colgate toothpastes and mouthwash, Palmolive soaps and Hill’s pet food to cleaning products like Ajax and Fluffy, it’s a far cry from Colgate’s beginnings in 1806 as a soap and candle shop. Colgate and Palmolive merged in 1928, two years before listing on the NYSE.

Turn up the volume

The power of its portfolio of everyday brands was underscored by its Q2 earnings. It was the fourth consecutive quarter of double-digit growth in operating profit, net income and earnings per share. Gross margins also expanded. 

This consistency has been driven by the company’s ability to grow both volumes and pricing. Total organic sales rose 9% in Q2 as volumes rose 4.7% and pricing increased 4.2%. Latin America – notably Brazil – was the standout with organic sales growth of 18.8% year-on-year, or 7.6% after accounting for currency impacts.  

Colgate-Palmolive is a truly global company. A quarter of its sales come from Latin America, 20% from Europe and 14% each from Europe and the Asia Pacific. Africa/Eurasia brings in 5% and Hill’s pet food accounts for 22% of sales. 

Significant exposure to developed markets and faster growing emerging markets allows it to allocate capital to where it sees the strongest growth opportunities. CEO Noel Wallace says that, while there was more value-based shopping in North America, volumes were strong in Latin America and Africa, and ‘pleasingly’ there was good volume returning in Asia, especially India.  

The price is right

Inflation has been the company’s friend over the past couple of years. It has given cover to drive strong price increases across all categories and markets. Combined with a reduction in costs as a proportion of sales, price rises have driven stronger profit margins. While price growth may slow, the company is confident that stronger volumes, market share gains and the ongoing focus on costs will deliver solid earnings growth. 

Colgate-Palmolive has proved it can continue to grow share even in categories where it dominates. Its share of the global toothpaste market increased from 39.6% in FY21 to 41.5% in FY24. New products enable this once sales of Colgate start slowing. For example, Elmex toothpaste was launched into Brazilian pharmacies and became a new source of volume growth. Innovative whitening products have also driven market share gains in a category that enjoys premium pricing.

The company backs its brands in the battle for shelf space with strong advertising spend. This was up 18% year-on-year in Q2 and has increased at a double-digit pace over six consecutive quarters.

Cashing in

Management’s upbeat outlook for the business in FY24 was underlined by upgraded guidance for sales and EPS. 

Organic sales are forecast to increase between 6% and 8%, up from a prior forecast of between 5% and 7%. EPS growth expectations have gone up to between 8% and 11%. Gross margins should also expand.  

Strong sales should translate to healthy cash flows, helping sustain Colgate-Palmolive’s enviable track record on dividends. It has recorded 61 years of consecutive dividend increases and 129 years of consecutive dividend payments. Consensus forecasts point to a total dividend of around US$2 a share in FY24, increasing to US$2.10 in FY25.

Boring but beautiful

Colgate-Palmolive isn’t the world’s sexiest stock, but its strong brand portfolio has allowed it to weather tough times for consumers. Over the past year it has outperformed similar companies like Procter & Gamble ($PG) (+15%) and even Unilever ($UL), which has gained a respectable 31%. Keeping its brands top-of-mind among shoppers has won it hefty market shares. As they say, winners are grinners.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.