Saturday, May 14, 2011

Great Colgate Palmolive Analysis

After reporting a solid first quarter and indicating that it has instituted pricing actions that will enable it to continue to gain market share and hold margins, CL stock has rallied substantially and now trades near all-time highs.  Which begs the question - has the stock topped out?

Management has raised the dividend to $0.58 per quarter, or $2.32 over the next year and has continued a frantic pace of stock buybacks while managing to pay cash for Unilever's Sanex business.  This will provide CL with an even stronger European market position.

This breakdown estimates the value of CL stock at $95 based on historical valuation.

I think it is about right based on my own internal DCF models. My own view is that the company is likely to earn near $5 per share this year.  It will depend on how the 2nd half goes (though lower commodity costs should help margins) and of course, how much stock the company is able to buy back.

There is no doubt that the company will be able to continue to grow earnings and take advantage of its market position to maintain margins (the company vows to improve them).

The stock remains a core holding for me, with the expectation that it will provide a nice dividend income sufficient to function as a small pension in retirement.  Nothing is more satisfying than watching the growth in each quarterly dividend payment and knowing that even as I am accumulating shares, the number of diluted shares outstanding continues to contract sharply, ensuring that each share represents a growing share of the future earnings of an incredible business.

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