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Colgate: No brushing aside dividends

Apr 17, 2009

In the previous article on the dividend series, we had discussed the application on P&G of an approach through which one can achieve returns entirely from dividends. In this article, we shall discuss another company, Colgate-Palmolive and apply the same frame work. Colgate-Palmolive India is 51% subsidiary of Colgate-Palmolive USA. It has operations in India since last 50 years. The company manufactures and markets products for oral care, personal care and household care. Oral care products contribute 90% to total revenues. The company acquired Hindustan Ciba Geigy (Cibaca) in the year 1994, which helped it increase its market share. In this core business, Colgate dominates, enjoying a 47.4% market share in toothpastes and about 46.7% in toothpowders in India. The company also has a significant market share in the toothbrush category. This and shaving brushes accounted for 10% of its FY07 revenues. In India, Colgate ranks No.1 in top of the mind recall in many consumer surveys. Other products include personal care products like shower gels, shower creams, toilet soaps, liquid hand washes, and shaving creams mostly under Palmolive brand. In the household segment, Colgate markets dish-washing soaps under the brand name Axion.

Colgate:Dividends v/s EPS
Source:CMIE

Colgate has been continuously paying dividends to its shareholders during last eighteen years. Its dividend per share growth stood at a CAGR of 3% between the period FY91 and FY08, which was in line with its earnings per share growth during the same period. The average dividend payout ratio during the last 18 years stood at a dazzling 86%.

If one looks at the company’s performance during the last one decade i.e. the period between FY99 and FY08, the company has clocked in a higher earnings growth, a CAGR of 21%, while the growth in dividend per share stood at a CAGR of 18% during the same period. The average dividend payout ratio during this period stood at even higher levels of 91%. This shows that the company has become more generous in terms of rewarding its shareholders during the last one decade. Given this amazing track record, we believe that there is very little chance that the company might stop paying dividends to its shareholders.

At current price level, the dividend yield of Colgate Palmolive is around 3%. Here if we assume that the company continues to grow its dividend per share at around 18% per annum, the investors would be able to obtain a 10% return annually on his investment from dividends alone from 5th year onwards. This can be backed by the fact that Colgate Palmolive has a minimum capital expenditure and working capital requirements. It may be also noted that currently, it has Rs 1.5 bn of cash on its balance sheet. Moreover dividends are only way with which it can repatriate profits back to the parent company.

Conclusion
Colgate is currently trading at a decent dividend yield, furthermore healthy cash reserves and sustained growth is likely to make the company a sound dividend income generator for a long term investor. However, investors should bear in mind that the desired results of 10% returns from the dividends alone can be achieved only if the investor stays invested in the company form long term perspective. Nevertheless, change in the management policies, capex plans and environment in which the company operates can significantly impact the future dividend payout.

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