The Motley Fool Previous Page

Has Colgate-Palmolive Become the Perfect Stock?

Dan Caplinger
July 27, 2012

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Colgate-Palmolive (NYSE: CL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Colgate-Palmolive.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.6% Fail
  1-Year Revenue Growth > 12% 5.7% Fail
Margins Gross Margin > 35% 57.6% Pass
  Net Margin > 15% 14.4% Fail
Balance Sheet Debt to Equity < 50% 213.7% Fail
  Current Ratio > 1.3 1.48 Pass
Opportunities Return on Equity > 15% 91.9% Pass
Valuation Normalized P/E < 20 21.39 Fail
Dividends Current Yield > 2% 2.3% Pass
  5-Year Dividend Growth > 10% 11.5% Pass
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Colgate-Palmolive last year, the company has fallen by a point. Falling margins and a higher valuation are to blame for the loss, although the stock has climbed more than 20% over the past year.

Colgate has the same attractive traits that many of its consumer-products peers have: a defensive orientation in tough stock market environments. Like Procter & Gamble (NYSE: PG  ) and Kimberly-Clark (NYSE: KMB