Is Colgate-Palmolive a Good Pick for the Long Run?

Colgate-Palmolive continues to add market share in the manual toothbrush and mouthwash segments. Like Unilever and Procter & Gamble, the company focuses on cost-saving initiatives to drive the bottom line.

Feb 9, 2014 at 3:13PM

Colgate-Palmolive (NYSE:CL) has experienced a 6.7% drop in its stock year to date, lagging its global consumer-goods peers Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL). Procter & Gamble and Unilever had similar declines, at more than 5% year to date. However, Colgate-Palmolive's shareholders could still be bullish after the company reported a strong fourth-quarter operating performance.

Increasing EPS with growing global market share
In the fourth quarter, Colgate-Palmolive managed to grow its sales by 2%, with 6.5% year-over-year volume growth. Organic sales (net sales excluding foreign exchange, acquisitions, and divestments) were strong at 6.5%. Net income in the fourth quarter came in at $564 million, or $0.60 per share, including the impact of after-tax charges caused by the implementation of a global growth and efficiency program, legal issue in Europe, and costs related to the sale of land in Mexico. Excluding those after-tax charges, its adjusted fourth-quarter net income reached $697 million, or $0.75 per share, which was 7% higher than last year's earnings per share.

According to Ian Cook, the company's chairman and CEO, strong 6.5% organic sales growth was mainly driven by the emerging markets, which experienced a 10.5% organic sales increase. In order to fund increased advertising expenses to drive market share growth, Colgate-Palmolive increased its gross profit margin as a percentage of sales, from 58.4% last year to 58.9% this year, and cut overhead costs as a percentage of sales from 34.7% to 37%. Year to date, Colgate-Palmolive has managed to grow its global manual toothbrush market share by 40 basis points to nearly 33% and the global mouthwash market share by 130 basis points to around 17%.

Colgate-Palmolive is on track with its global growth and efficiency program
With the impressive fourth-quarter earnings results, Colgate-Palmolive is on track to reach the target of its global growth and efficiency program, including expectations to deliver annual savings of $365 million to $435 million by the fourth year of the program. In October 2012, the company targeted that 2013 savings should be around $30 million to $40 million after tax. It has actually achieved the high estimate of the 2013 savings, realizing after-tax savings of $40 million.In 2014, after-tax savings are estimated to about double and reach $90 to $100 million.

Unilever and Procter & Gamble also focus on cost-saving initiatives
Its global peers, Unilever and Procter & Gamble, also initiated cost-cutting programs to drive their profitability. In February 2012, Procter & Gamble set a savings goal of $10 billion by 2016, including $6 billion savings in the cost of goods sold, $1 billion in marketing spend, and $3 billion in savings in overhead. Within this fiscal year, the company expects to have more than $1.6 billion in savings in the cost of goods sold including logistics, material costs, and other manufacturing expenses. Thus, the company's manufacturing productivity is estimated to increase by 6% within this year.

Unilever could improve its bottom line with ongoing cost-saving initiatives. The company will reduce its marketing headcount by 12%, or around 800 jobs, especially in the U.S. region. To cut costs on agency and commercial reduction expenses, its total number of SKUs (stock keeping units) will be reduced by 30% by year-end.

My Foolish takeaway
The ongoing cost-cutting initiatives will definitely improve Colgate-Palmolive's profitability in the near future. As the market leader in the global oral-care business, Colgate-Palmolive possesses a significant moat to protect and grow shareholder value in the long run. Investors could enjoy a decent 2.3% dividend yield at the current trading price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. 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.

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