Our Top Dividend Stock Idea

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, the Motley Fool's 170,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:

Let's see ...
Shampoos, shower gels, deodorants, shaving products, and of course, what it's most known for, toothpaste, of which it commands a 45% share of the market. Colgate-Palmolive (NYSE: CL) also owns specialty pet food maker Hill's, which is sold through veterinarians and specialty pet retailers.

Now for the numbers.
I looked at the debt. I think its debt/equity was something like 1.3 or something like that. It's hard to remember something that immediately loses any importance once I looked at its interest coverage. With interest coverage of 56.8 as listed here at CAPS "ratios" page, the current debt just doesn't matter. If you want to worry about it, knock yourself out.

My main concern as a dividend investor is that the debt level doesn't threaten the dividend and force dividend growth to slow down. When I see interest coverage of 56.8, I go on to other things. [Colgate's] gross margin is an incredible 61.6%. Hey out there. Have any of you ever read "Warren Buffett And The Interpretation Of Financial Statements?"

Anyway, a consistently high gross margin like that is an indication that the company can sell its products at a very high profit, and doesn't have to cave in to competition and engage in price wars to compete. It's a major clue to look for in the search for a company with a competitive advantage. Colgate apparently has one, I would say. High return on equity is another clue, and [Colgate's] ROE is is 87.9%.

I didn't look at return on assets, which would be equal to the return on equity in the absence of any financial leverage, because as I said, with an interest coverage of 56.8%, I'm just not worried about it. Maybe I'll look at it simply out of curiosity when I'm done typing up this pitch.

Let's see, what else...
Current P/E is 18.3.
5-year hi P/E is 27.3.
5-year low P/E is 12.5.
There's room for it to go either way, I guess, but the market's trending upwards. Being a "defensive" stock, this one probably won't rise as fast as the rest of the market, and won't fall as fast as the rest of the market, either. I believe its "beta" was somewhere around 0.50.
So the most immediate effect of this as a CAPS pick, since it probably won't rise as fast as the market, will probably be to drag my CAPS score down even more. Oh well. Maybe I should go short a bunch of stuff.

This is an outstanding pick as a long-haul dividend growth stock. [Colgate] has raised its dividend for 47 consecutive years.
Dividend growth rate:
3 year.....13.24%.
5 year.....12.26%.
At this rate, using the rule of 72, this is a dividend that should double every six years.
You might notice what appears to be an error in the 5-year dividend growth rate I listed. It's just maybe 1% or so different than the rate you'll find listed here at CAPS "ratios" page.

That's because I got the dividend growth rate information from dividendinvestor.com.
Dividendinvestor.com gives you both a 3-year and a 5-year dividend growth rate, and if I'm going to use their 3-year dividend growth rate, I figured I should use their 5-year dividend growth rate as well.
75% of [Colgate's] sales come from overseas. A lot of people might really like that.
Dividendinvestor.com lists the dividend payout ratio as 49%, while our CAPS page lists it as a little less, but there isn't enough of a difference to matter.

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