Cl Image

Source: Colgate-Palmolive.

Dividend Aristocrats are a select group of high-quality companies that have proven their financial strength by increasing dividends for at least 25 consecutive years. It takes a particularly solid business to build a consistent track record of dividend growth over time, but investment decisions must be based on future potential, not past performance.

Let´s look at Colgate-Palmolive (NYSE:CL) to see whether now is a good time to buy this global leader in consumer goods.

The business
Colgate-Palmolive has a presence in several consumer staples categories, including oral care, pet nutrition, home care and personal care. The company´s pet nutrition business accounts for a sizable 13% of total sales; however, the bulk of revenue and profit come from its leadership position in the global oral care market.

While Procter & Gamble's (NYSE:PG) Crest brand is a noteworthy competitor in the U.S., Colgate-Palmolive's deep focus in oral care has advantages versus its peer's more diversified approach to products and categories, especially when it comes to international markets. 

Management estimates that Colgate-Palmolive owns a global market share of 44.4% in toothpastes, 33.2% in manual toothbrushes, and 38.9% in mouthwashes. The company has done a tremendous job at expanding into high-growth emerging markets: Colgate-Palmolive has a market share of 79.9% in toothpastes in Mexico, 71.5% in Brazil, 54.7% in India, and 33.7% in China.

Cl Brands

Source: Colgate-Palmolive.

The company does business in more than 225 countries, and it generates over 80% of its revenue outside the U.S. This can be a source of added volatility due to the financial impact of exchange rate fluctuations on a quarter-to-quarter basis. However, international diversification also means Colgate-Palmolive offers substantial room for growth as the company can benefit from increased income levels and rising consumer demand in emerging markets over the long term.

Management estimates that annual per-capita consumption of toothpaste is about 137 grams per year in India and 277 grams per year in China. In comparison, per-capita toothpaste consumption in the U.S. is roughly 561 grams per year.

Pricing is very different, too: An ounce of toothpaste sells for approximately $0.16 in India and $0.41 in China, while it costs a much higher $0.69 in the U.S. The average price of a toothbrush is about $0.21 in India and $0.59 in China, versus $2.59 in the U.S.

This shows that Colgate-Palmolive has significant room to continue profiting from a rising middle class in emerging markets over the years ahead.

The numbers
It's usually hard for a leading player in a mature industry to generate growth, but an international presence and culture of permanent innovation have enabled Colgate-Palmolive to generate consistent sales growth and solid profitability for investors for decades.

Profits

Source: Colgate-Palmolive.

The business continued to perform well in its mostly recently reported quarter, even as currency exchange fluctuations are dragging on performance in the short term. Year-over-year sales were roughly flat during the second quarter of 2014, at $4.35 billion, but organic sales increased by a healthy 4% when adjusted by foreign exchange fluctuations, acquisitions, and divestments. Organic sales in emerging markets delivered a particularly strong annual increase of 6.5% during the quarter.

Adjusted gross margin increased 20 basis points to 58.8% of sales as strong pricing and cost savings under the company's 2012 restructuring program more than offset higher raw materials and packaging costs. It's good to see management running a tight ship and the company generating expanding profit margins in spite of the negative impacts from rising input costs and currency exchange fluctuations.

Colgate-Palmolive has paid uninterrupted dividends since 1895, and it has raised those payouts for 51 years in a row, including a 6% hike announced in March of this year.

During the first six months of 2014, Colgate-Palmolive produced almost $1.1 billion in free cash flow, while dividend payments required only $662 million. This indicates the company's financial strength allows for considerable room to continue increasing dividends in the future.

The dividend yield is not too impressive at 2.1%; however, everything suggests Colgate-Palmolive will deliver substantial dividend growth in the years ahead.

Key takeaway
Colgate-Palmolive benefits from an enormously valuable leadership position in the global oral care industry. Even if currency headwinds are negatively affecting performance, the company is still generating healthy sales growth on an organic basis, especially in emerging markets. With profitability remaining strong and cash flow generation comfortably covering dividend payments, Colgate-Palmolive still has what it takes to make dividend investors smile. 

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.