Colgate-Palmolive: Gladly Holding, Yet Currently Not Buying An All-Time Favorite (NYSE:CL)

cyano66/iStock via Getty ImagesIntroducing My Approach To CL Common advice I have heard is that one should not have “favorite stocks” in the sense of “liking” them because it can hinder objective and rational evaluation of investments. Yet I must admit that I see Colgate-Palmolive as one of my all-time favorite holdings. Understand this as a disclaimer regarding potential bias. Not just do I like the company from an investor’s perspective, but also because of consuming their products regularly. I do like businesses whose success and quality can be observed daily. While having “favorite stocks” can sometimes counter rational analysis, on the other hand, psychological effects of regularly seeing the products in supermarkets might be helpful to stick to the “Hold” in “Buy and Hold”. Additionally, consumer staples are one of my favorite sectors simply due to their nature of hardly ever being saturated: when the toothpaste tube is empty, you always need to buy a new one. In this article, I will: Disclose my personal involvement in the stock and recent coverage, Provide operational and strategic company highlights, Shed light on price elasticity for CL, which is crucial to consumer staples, and finally, Explain why, despite strong long-term backing, I consider the stock price to have run too far ahead too quickly. Personal Involvement And Coverage History Colgate-Palmolive (NYSE:CL) holds an above-average 7% portfolio weight for me, compared to an average of 5% per position, and yielded me approximately 20% annualized returns so far. This is high for CL — thanks to well-timed purchases and recent stock-price increases. Over the long run, CL has achieved annualized total returns of: 5,8% since 2000 7,4% over the last 20 years 8,5% over the last 15 years 5,3% over the last 10 years and 7,8% over the last 5 years. So, we observe long-term almost market average returns or, depending on which market we benchmark with, probably slightly below market average over most periods. But that is by design, similarly to what I have laid out in my recent analysis about General Mills. Slightly lower returns can be rewarded with low risk, which is the case for General Mills, and what Colgate-Palmolive is another prime example for. Recent coverage of CL by me was for a German investment community at the end of May 2023, about 13 months ago, with the conclusion that CL was a Buy under $76. Walking the talk, I expanded my CL position, and the stock has yielded +33% since then. Total Return since my recent coverage, rating CL Buy below 76$ : +33% (Aktienfinder.net)Operational And Strategic Highlights I hardly need to point out CL’s 61-year streak of dividend increases yet again. Also, past performance is no guarantee for future results. However, this does indicate a highly resilient business model. And resilience is almost too weak a term for CL, which consistently holds market-leading positions with a recent 41.3% share in the toothpaste market, paired with 31.7% in toothbrushes. CL is also a market leader in pet food for US veterinary clinics and hand soap, as well as holding the second position in categories such as mouthwash and hand dishwashing detergent. Colgate Palmolive Having talked about long-term historical successes in the first point regarding dividends, Colgate-Palmolive has been active in all its current markets for nearly 100 years and, in some cases, for over 200 years. And these markets span almost the entire globe. See below an overview of CL’s wide range of well-known brands and sectors: Colgate Palmolive In my last coverage just over a year ago, I reported an upward revision of the full-year outlook after the first quarter. The same has happened this year. Net sales mid-point was raised from 2.5% to 3.5% despite higher expected FX effects. Therefore adjusted, the full-year outlook was even more significantly raised from 4% to now 6%. Additionally, there is an expected continuation of the meanwhile two-year trend of rising margins. Quickly addressing the balance sheet, CL has little equity recorded, sometimes even negative, due to consistent share buybacks. This is mitigated for me by the fact that CL’s interest-bearing debt of $8.7 billion is offset by a free cash flow of nearly $3 billion. Hypothetically, if desired, the company could be entirely debt-free in three years without shareholder returns – a healthy duration. Rock Solid Price Elasticities See below how CL’s top-line performed in the most recent quarter YoY, split by volume, pricing, and currency effects, with the total net sales changes represented by the dark blue dot. Additionally, it is split by regional segment as well as showing the total company on the right. Across most segments, it is evident that significant revenue increases are still being achieved primarily from price hikes, with some segments even supporting this by rising sales volumes. The most significant headwind comes from foreign currencies. I find this whole picture particularly impressive when we compare it to the exact same graphic from my analysis one year ago. Author | Data: Colgate PalmoliveSo, below you see the first quarter of 2023 compared to previous years’. Naturally, the price increases were more pronounced due to still higher inflation at that time. However, it was already observable that the extent of price hikes might have been almost excessive, given the partially declining volumes as a consequence. I find it all the more impressive that notable price increases are still being implemented now in 2024, while the volume picture has improved at the same time. (Incidentally, the most substantial price increases often occur in developing countries with more inflationary currencies, which are then tempered by the currency effect.) Author | Data: Colgate PalmoliveValuation Appears Stretched Regarding valuation, I approached it from four perspectives: Dividend Yield Historical Adjusted P/E Peer Group Comparison DCF (Discounted Cash Flow) Analysis based on analysts’ estimates First, the chart below shows Colgate-Palmolive’s dividend history over ten years, with the dividend yield over time (solid blue line) and its ten-year average (dashed blue line). The current dividend yield of just 2% lies significantly below its long-term average of 2.3%, despite elevated interest rates in recent years. CL Dividend History | Div-Yield – blue line | 10y average div-yield – dashed line (Aktienfinder.net)A look at the historical trend of the adjusted P/E ratio over ten years paints the same picture. The current adjusted P/E is significantly at the upper end of the ten-year range, far from its historical average. CL adjusted P/E History and 10y average (dashed line) (Aktienfinder.net)Now, this could be justified by above-average growth. Hence, below you will see a peer group comparison with peers suggested by Seeking Alpha. Here, CL has the second-highest adjusted P/E by a wide margin, only lower than that of Church & Dwight. While a high P/E can be justified by high stability, which is undoubtedly the case for CL, it can still run a bit hot in the short term. Pay attention to the long-term historical growth rates in the upper left corner. Church & Dwight seems to justify its high P/E with the highest long-term growth. However, CL does not necessarily stand out in terms of growth in a way that would justify such an elevated P/E. CL & Peer Group – adjusted P/E Histories & respective EPS growth rates (Aktienfinder.net)These were three initial valuation indications (Dividend Yield, Historical adjusted P/E, and Peer-Comparison). Next, we will quantify it more concretely in a DCF model. For this, I rely on the full range of analyst estimates until 2028. At least three estimates are available until this period. It’s worth noting that due to the stable business model, the range of estimates doesn’t diverge widely, as seen with Nvidia, which I recently evaluated in a similar manner using all available estimates. Free cash flows have been derived based on historical conversion rates from EPS. My WACC for CL stands at a moderate 7.5%, reflecting elevated country risks due to global developing markets exposure, though moderated by a low beta factor. Additionally, debt costs have a slightly reducing effect. Side note: Only a few days left until renowned Professor Damodaran is expected to deliver his semi-annual update on equity risk premia, which I often rely on for simplicity. On the right, in brown and yellow, you see the historical free cash flow depicted alongside operating cash flow for multiple years. The gap represents CAPEX, amounting to about 20%. This is assumed as the retention rate, consistent with a historical payout ratio of around 60%, considering some further cash will be used for buybacks or potentially debt service. With this retention rate, along with the WACC and CL’s typical returns on invested capital, I estimate CL’s terminal growth rate to be 2.5%. Author | Data: Seeking Alpha, Damodaran, Aktienfinder.netBased on the sensitivity analysis with varying WACC and terminal growth rate assumptions, the differences between the worst-case, consensus, and best-case analyst forecasts are not particularly large. However, sensitivities indicate the price ranges shown below. The current stock price of over $97 USD thus falls under the bold-highlighted assumptions, depending on the scenario. These scenarios and sensitivities are not entirely implausible, but they suggest that current pricing may underestimate risks to some extent. Valuation is the sole reason why I am currently leaning towards a Hold position. I believe that there will be opportunities to enter this quality company at more attractive prices in the future — whether through a correction or a prolonged period of sideways movement remains to be seen. Author | Data: Seeking Alpha, Damodaran, Aktienfinder.netConclusion Colgate-Palmolive remains one of my all-time favorite holdings, reflecting its resilient business model and consistent performance. While this analysis reaffirms my long-term conviction, it also highlights stretched valuations, prompting a temporary Hold stance. The company’s attractive price elasticities underscore its brand strength, yet current market pricing appears ambitious, evident through numerous valuation approaches. Looking forward, I anticipate opportunities for more favorable entry points, whether through market corrections or prolonged consolidation. Colgate-Palmolive remains a cornerstone of my portfolio.

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