Dividend stocks tend to be the safe haven investors seek out in a recession, and with good reason. Going all the way back to 1930, there has never been a decade when dividend payers in the S&P 500 have posted negative returns. Even during the so-called "lost decade" when the broad market index lost 0.44% for the 10-year period between 2000 and 2009, dividend stocks still produced 1.8% positive returns for investors.
Dividend Kings are a small, rare group of companies that not only pay a dividend, but have raised their payouts every single year for 50 years or more. Although their stocks are not immune from having ups and downs over time, they are typically more stable businesses because dividend programs tend to instill discipline and sound financial oversight.
All else being equal, dividend payers will not exhibit as much downside risk as non-payers because shareholder payout can partially offset any lack of capital appreciation. Let's take a look at one example investors might consider now.
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Resting on its laurels
Colgate-Palmolive (CL 0.85%) is a global consumer products giant that first paid a dividend way back in 1895, but began increasing the payout annually in 1963. Best known for its toothpaste and dish washing liquid, Colgate also owns a portfolio of popular brands such as SpeedStick deodorant, Murphy oil, Irish Spring soap, and Ajax household cleaner.
Colgate took in over $17.4 billion in sales last year, up 5.8% from 2020. But its stock has lost 16% of its value this year as profits have been hit by inflation, rising commodity costs, and currency exchange rates (70% of its revenue comes from international markets).
Although organic growth was 9% higher in the second quarter following 4% gains in the first, one area that has shined brighter than all others has been its pet food business, Hill's Pet Nutrition, which saw sales jump 14% and 11%, respectively. The segment represents 20% of Colgate's total sales.
Billionaire investor Daniel Loeb of Third Point Capital has also noticed the outperformance. Loeb has taken an undisclosed stake in Colgate with an eye toward having the unit spun off into a separately traded business as a means of enhancing shareholder value.
Waking the sleeping giant
According to Loeb, Hill's Pet Nutrition has been growing at twice the rate of Colgate for the past few years while generating mid- to high-20% operating profit margins. Because it has proactively been making acquisitions for pet food manufacturing plants to shore up any capacity constraints, the division is poised to accelerate growth and steal market share from its rivals, says Loeb.
The hedge fund manager maintains that if Hill's was a stand-alone business in charge of its own destiny, and not competing for attention and resources from the other businesses inside Colgate, it would likely grow even faster and could attain a $20 billion valuation in 2023. "Hill's is a valuable consumer growth company and hidden gem inside of Colgate's other defensive product portfolio," he said.
Third Point already sees Colgate shares compounding at a mid- to high-teen rate just from earnings growth and its dividend (currently yielding 2.6% annually). And the hedge fund believes Hill's separation could "add materially to our expected return."
Further catalysts for growth
Colgate wouldn't be alone in undertaking such a transformation. GlaxoSmithKline and Pfizer are spinning off their consumer health joint venture Haledon, which competes against Colgate with brands like Sensodyne and Polident. And Johnson & Johnson is similarly separating out its consumer health business (now called Kenvue) that houses brands such as Listerine, Tylenol, and Neutrogena.
Loeb sees potential consolidation arising from these actions, which offers more opportunity for Colgate's brands but indicates significant latent potential for this sleeping giant.
With the stock down sharply in 2022, Colgate-Palmolive is trading at a reasonable 22 times next year's earnings. For those with a long-term investment horizon who don't need the money for bills or an emergency, a spinoff of the Hill's Pet Nutrition business could be the catalyst that moves the needle on this Dividend King.
