The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Colgate-Palmolive (NYSE:CL)
New York, N.Y.
$50.59
52-week low-high: $42.89-$59.04
$27 billion market cap
By Brian Richards (TMF Brich)
The great game of basketball was invented in Springfield, Mass., when James Naismith, a forward-thinking physical education instructor, created an indoor game to entertain students during the chilly New England winter. The year was 1891.
Consider that the year before Naismith started tossing soccer balls into peach baskets, Colgate-Palmolive introduced its innovative toothpaste-in-a-tube product. Though Colgate started operations early in the 19th century, it did not begin manufacturing toothpaste until 1873. For 17 years, it struggled to find an efficient dispensing mechanism for the oral-care product.
That was long ago (115 years, to be exact). From its 200-year history to its established products to its CEO, who has been with the company since 1963, everything about Colgate-Palmolive says long term.
In Round 1, I highlighted the company's ubiquitous product line -- which in addition to the two namesake brands includes deodorants, aftershaves, laundry cleansers, liquid hand soaps, and pet food -- and the sturdy competitive advantages it provides.
I also highlighted the solid management team, its consistent buyback policy, its long-term outlook in effecting painful but necessary workforce cutbacks, and its perfect-10 global governance rating.
The 21% dividend increase this year (besting the 14% per-annum growth over the past 27 years) tells me that Colgate-Palmolive puts shareholders first.
OK, OK. I don't want to harp on history; I do want to suggest that Colgate-Palmolive's stable past performance should forecast things to come. Despite strong competitors such as Clorox (NYSE:CLX) and Johnson & Johnson (NYSE:JNJ), Colgate's 2004 sales rose 7%, boosted by a strong fourth quarter. (And in a Foolish March Madness tournament, don't you want your team to perform best late in the game?)
Colgate maintains an excellent balance sheet and high debt rating, and it turns net income into free cash flow. It is not confined by geographical borders, either: It operates in more than 200 countries worldwide with roughly 70% of sales coming from those markets, according to its own statistics.
Philip Durell, advisor for Motley Fool Inside Value, best expressed the relationship between Colgate-Palmolive's past and its future success: If investors had reinvested dividends over the past 27 years, they would be holding a 35-bagger. Nevertheless, Durell has "far more confidence that Colgate can repeat this performance over the next 27 years."
Basketball and Colgate have come a long way since their 19th-century roots -- but from my seat, both are just getting started.
Brian Richards does not own any company mentioned in this story, though he does wonder whether Dr. Naismith came up with basketball while brushing his teeth.
Kinder Morgan
(NYSE:KMI)
Houston, Texas
$74.80
52-week low-high: $56.85-$81.57
$9.68 billion market cap
By Rich Smith
In Round 1, I suggested -- and you agreed -- that natural gas pipeliner Kinder Morgan is "one company you can place your faith, and your money, in with full confidence."
Because Kinder Morgan is run by shareholders, for shareholders. Its CEO and major shareholder, Richard Kinder, doesn't collect a paycheck. Instead, he lives off of the same dividends that pay his investors. If they don't benefit -- he don't eat. You have to admit that that's a pretty powerful incentive for Kinder Morgan to deliver the goods.
Today, I want to explain how Kinder Morgan goes about making that delivery. And I'm not choosing my words lightly here, because "delivery" is Kinder Morgan's stock in trade. The company moves natural gas across a network of 35,000 miles of pipe. It also collects a tidy sum for managing the activities of sister company Kinder Morgan Energy Partners (NYSE:KMP), which transports various other forms of fuel (gasoline and diesel, for example).
But all that's just details. At its very essence, what Kinder Morgan does is run a tollbooth, smack-dab in the middle of the American energy highway.
You all know the tollbooth analogy. Master investor Warren Buffett loves these kinds of companies -- legalized regional monopolies that get to sit around and collect a fee for everything that happens on their watch. In fact, Mr. Buffett bought two pipeline systems of his own in 2002, one from Williams (NYSE:WMB) and one from Dynegy (NYSE:DYN). Any time someone wants to move fuel from Point A to Point B over a pipeline connecting the two points, they have to pay the piper -- or in this case, the pipeliner.
It doesn't matter whether the economy's going gangbusters, or whether we're in the throes of a recession. People need fuel. It doesn't matter whether the price of oil is $60 a barrel or $6. People need fuel. And with Kinder Morgan's diversified set of pipes, it doesn't matter whether people use natural gas or heating oil (or buy electricity created from either one, or from coal) to heat their homes, cook their dinner, and make their showers comfortably steamy. People need fuel -- and every time they turn the heat up, Kinder Morgan charges its toll for delivery.
So to KMI shareholders I say: Ask not for whom the pipe tolls. It tolls for you.
Fool contributor Rich Smith has no position, short or long, in any company mentioned in this article.
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