The S&P 500 Dividend Aristocrats is a group of S&P 500 companies that have increased their dividends each year for the last 25 years. One constituent of the index, Colgate-Palmolive (NYSE:CL), boasts returns for investors over the years that have easily outpaced the market as well as competitors such as Procter & Gamble (NYSE:PG) and Clorox (NYSE:CLX).
Over the last ten years, Colgate-Palmolive shareholders have seen their stakes rise 203%, well ahead of the S&P 500, which returned a total of 116% over the same time-frame. Colgate-Palmolive has also handily outperformed both Procter & Gamble and Clorox, which returned totals of 94% and 132%, respectively, over the last ten years.
Taking a look into Colgate-Palmolive we find that it has a strong financial footing and lasting competitive advantages that will help propel it past the market in the future.
Balance sheet health
A leveraged balance sheet can enhance shareholder returns, yet an overly leveraged balance sheet can cause huge problems for companies and investors. It appears that Colgate-Palmolive has found a happy medium that helps it reach high levels of profitability with relatively low debt-service costs.
Colgate-Palmolive's long term debt-to-equity ratio has grown from 0.9 to 2.1 over the last five years, yet in fiscal 2013 the company's interest coverage ratio, or operating profit divided by interest expense, was still over 27. An interest coverage ratio of over 27 is considered very safe and an unforeseen economic slowdown should not threaten this company to the point of default.
On the other hand, Colgate-Palmolive's competitor Procter & Gamble has averaged a long-term debt-to-equity ratio of 0.32 over the last five years, but it has a lower interest coverage ratio of 21.7 for fiscal 2013. And lastly, Clorox has an incalculable long-term debt-to-equity average over the last five years because it routinely has negative stockholders' equity because of its large amount of debt. Clorox's long-term debt to total capitalization has averaged nearly 50% over the last five years, which results in a much lower interest coverage ratio than those of competitors that have averaged 7.4 over the same time-frame.
Investor favorites: efficiency and profitability
Because of the healthy levels of leverage Colgate-Palmolive employs, the company can achieve extreme levels of profitability. Return on assets shows us how well a company's management can put its assets to work and produce profits from these assets, and again Colgate-Palmolive trumps the competition.
Over the last five years the company has reported an average return on assets of 19.4%, more than double Procter & Gamble's average of 8.8% and also well above Clorox's average of 12.7%.
On another very important measure of efficiency and profitability, net profit margin, Colgate-Palmolive performs very well again. For the same five-year time period, the company averaged a net profit margin of 14.2%. This is just shy of Procter & Gamble's 14.5% average and above Clorox's 10.3% average.
Colgate-Palmolive's marketplace advantages
Numbers such as the ones mentioned above are extremely hard to achieve in a competitive marketplace such as the consumer goods industry. Colgate-Palmolive has achieved them because of excellent positioning in the market.
Colgate-Palmolive produces and sells many household brands that you use every day; examples include Colgate toothpaste, Speed Stick deodorant, and Palmolive dish soap. Nearly every product the company sells is a daily use product that consumers use in good economic times and bad, which is a huge advantage for this company as it ensures steady revenue.
Another fact that helps Colgate-Palmolive outperform is the relatively small scope of products it sells. The company has four segments: oral care, personal care, home care, and pet nutrition. Compared with other consumer goods companies, this is a very small range of products. The ability to focus on core operations helps the company achieve the efficient operations highlighted above.
The bottom line on Colgate-Palmolive
Colgate-Palmolive has steadily grown its revenue and earnings per share at rates of over 5% and 7%, respectively, over each of the last ten years on average. Due to its strong financial and marketplace positions, I expect this to be a long-term trend for this company.
The company is paying investors a dividend of 2.1% and is currently selling at nearly 30 times earnings, compared to an industry valuation of 23 times earnings and a market valuation of almost 19 times earnings. This company's stock valuation may be a bit high right now, but reinvesting dividends to achieve dollar-cost averaging could be an excellent idea with such a well-run company.
Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Jacob Meredith has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.