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

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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  • Report this Comment On March 31, 2014, at 6:09 AM, jackfleming wrote:

    I think that’s a very valid point of buying the stock on dips. Because we have been seeing the emerging markets struggling to increase their growth. Inflation has been rising and purchasing power of people there has decreased. If this situation further worsens, risks can be there. And the Fed tapering also would negatively impact the Emerging economies. But apart from this harsh reality, CL is showing strong Organic growth which can be an important factor in increasing their share price in the future . http://bit.ly/1lxvSbM

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Related Tickers

4/24/2014 1:14 PM
CL $66.13 Up +0.26 +0.39%
Colgate-Palmolive CAPS Rating: *****
PG $81.11 Up +0.75 +0.93%
Procter & Gamble CAPS Rating: ****
UL $43.63 Down -0.57 -1.28%
Unilever CAPS Rating: *****

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