In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:
- Over time, has this company steadily increased its payouts?
- How sustainable is the dividend?
- Does the company have room to further increase the dividend?
The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.
Today's pupil is Colgate-Palmolive (NYSE: CL), which posts a 2.8% yield.
Dividend history
|
Metric |
5-Year Annualized Growth Rate |
|---|---|
|
Dividend per share |
12.8% |
|
Diluted earnings per share |
12.2% |
Source: Capital IQ, a division of Standard & Poor's.
Colgate-Palmolive has paid uninterrupted dividends since 1895. How's that for a dividend history? Over the past five years, it has continued its commitment to dividends by raising its payout broadly in line with earnings-per-share growth.
Past returns don't guarantee future results, however, so dividend history is only 10% of the final grade. That said, Colgate-Palmolive scores a 5 of 5 for this category.
Sustainability
|
Metric |
Trailing 12 Months |
Final Grade |
Report Card Score |
|---|---|---|---|
|
Interest coverage |
59.1 times |
10% |
5 |
|
EPS payout ratio |
51.8% |
10% |
4 |
|
FCFE payout ratio |
59.7% |
30% |
4 |
Source: Capital IQ, as of Feb. 8.
Colgate-Palmolive has one of the more pristine balance sheets in the S&P 500, covering its interest expenses nearly 60 times over with operating profits.
The dividend is also well-covered by earnings and free cash flow, so the current payout looks very sustainable.
Growth
|
Metric |
Trailing 12 Months |
Final Grade |
Report Card Score |
|---|---|---|---|
|
EPS payout ratio |
51.8% |
10% |
3 |
|
FCFE payout ratio |
59.7% |
20% |
3 |
|
Sustainable growth rate |
36.7% |
10% |
5 |
Over the past few years, Colgate-Palmolive has consistently paid out this level of free cash and profit as dividends, and with the median analyst estimate for long-term earnings growth at 10%, one could very reasonably expect a medium-term dividend growth rate in the 7%-9% range.
Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.
|
Company |
Dividend Yield |
Median Analyst Est. Long-Term EPS Growth |
|---|---|---|
|
Procter & Gamble (NYSE: PG) |
3.0% |
9.75% |
|
Kimberly-Clark (NYSE: KMB) |
4.3% |
8.6% |
|
Clorox (NYSE: CLX) |
3.4% |
9.0% |
With a current yield of 2.8%, Colgate-Palmolive's payout may seem a little low relative to peers, but it certainly has room to increase its payout. The company also has a very meaningful share repurchase program -- last year it repurchased more than $2 billion of its shares.
Pencils down!
With all the numbers in, here's how Colgate-Palmolive's dividend scored:
|
Weighting |
Category |
Final Grade |
|---|---|---|
|
10% |
History |
5 |
|
Sustainability | ||
|
10% |
Interest coverage |
5 |
|
10% |
EPS payout ratio |
4 |
|
30% |
FCFE payout ratio |
4 |
|
Growth | ||
|
10% |
EPS payout ratio |
3 |
|
20% |
FCFE payout ratio |
3 |
|
10% |
Sustainable growth |
5 |
|
100% |
Total Score (out of 5) |
4.0 |
|
Final Grade |
B |
A score of "B" is very good, but it's below Colgate-Palmolive's previous years' scores of "A" in 2009 and "B+" in 2007 and 2008. The reason is that free cash flow to equity has decreased slightly, but it can be a volatile data point, so for now there isn't a major reason for concern.
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