What do you get when you own a stock for 27 years that averages an 11.5% annual return -- plus reinvest the dividends that average 2% annually? You get a 35-bagger and Motley Fool Inside Value recommendation Colgate-Palmolive
Inside Value was attracted to the consumer products giant in December 2004, when the stock price fell on bad quarterly earnings. At the time, the newsletter computed the stock's intrinsic value to be 20% higher. So far, the stock is up 12.2% -- more than double the Standard & Poor's 500's results over that time.
Today, the company is reporting strong sales and unit growth. Worldwide second-quarter revenue was up 10.5% over the same quarter last year for the strongest quarterly growth in almost 10 years (8% was related to volume growth, 2.5% to positive currency effects). Even excluding the recently acquired GABA oral care business, revenue still rose a solid 9%. A double-digit increase in global media spending drove this growth.
After excluding restructuring charges, net income declined 1%. Colgate-Palmolive still expects a majority of this year's restructuring benefits to fall into the second half of the year and reaffirmed that earnings for 2005 will be in the high single digits. The company expects double-digit earnings gains to return in 2006.
Colgate-Palmolive continues to exit the laundry detergent business, pulling it from Peru and Ecuador last year. Two weeks ago, the company announced that it will sell its North American heavy-duty laundry brands and book a one-time $60 million profit. While this low-margin business offered slow but steady growth (and profits), its departure will allow overall North American operating margins to increase by 100 basis points.
The company is focusing on high-margin, fast-growing oral, personal, and pet care businesses. Before laughing about pet care, its 27.3% operating profit margins exceed the 21.4% margins posted for the combined oral, personal, and home care businesses.
Colgate-Palmolive sells for 19.9 times 2005 expected earnings and is expected to grow earnings 10% a year for the next five years. For comparison, Procter & Gamble
Colgate-Palmolive's long-term growth is on par with the S&P 500's expected 10.6% annual profit growth. Unlike cyclical companies, consumer spending for the company's necessities won't dive in a recession -- although high-priced electric toothbrushes and the like may be more sensitive to consumer cash concerns. It is that steady, almost predictable growth, and a 2.1% dividend, that makes the stock a consideration for conservative investors looking for stocks to lock away for the long term.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
