Named Inside: One of My Favorite Consumer Staples Stocks

I don’t normally do this in Money and Markets, but today I want to do an in-depth story on one single company … a stock that is currently in the Dividend Superstars portfolio.

If you’re a paying subscriber to the newsletter, I don’t think you’ll mind that I’m naming the company here. After all, this is a great way for me to give you an update on the stock between our regular issues. Besides, I’m already tracking an open gain of 21.9 percent since my original recommendation to buy 50 shares back on March 30. So if you followed my instructions, you should already be sitting on a very solid return from this so-called “boring” stock.

The company in question is Colgate-Palmolive, maker of toothpastes and other household products. And the reason I want to talk about it today is because it embodies everything I like about solid dividend-paying U.S. stocks.

Plus, it just reported earnings last Thursday and the market’s reaction may be puzzling you. [Editor's note: If you're following Nilus on Twitter, you probably saw his brief comment on the stock right after earnings came out. If not, and you want to start getting his free alerts and updates, just click here.]

Colgate-Palmolive Beats the Street
But Gets the Cold Shoulder from Investors

Last Thursday, Colgate said profits increased a solid 14 percent over the same quarter a year earlier.

And while that’s good news, investors sold off the shares that same day, pushing them down 5.3 percent … even as the broad market rallied strongly! Shares of CL have been bouncing around ever since.

What gives? Why didn’t the stock rise?

The short answer: Everyone is concerned about the fact that Colgate’s revenues fell 5.5 percent during the quarter.

Now, I will be the first to say that rising profits on falling revenues are often a big red flag. In fact, it’s one of the primary reasons I have remained skeptical of many of the supposed “better-than-expected” earnings reports coming in this quarter.

That’s because cost cutting is usually behind the rising profits/falling revenues equation. And companies can only cut costs so much.

HOWEVER, in Colgate’s case, cost cutting was not the primary reason for the profit boost. Instead, Colgate’s profits were juiced by a 7.5 percent price hike across the company’s entire product range in the second quarter.

Stop and think about that. During this terrible recession — which is wreaking havoc around the globe — Colgate actually hiked the prices of its goods and the vast majority of its customers kept buying them.

In fact, overall sales volumes declined just 1.5 percent. Sure, the company’s relatively small pet food products division saw a much bigger 11.5 percent volume decline. But by and large, most global consumers kept buying toothpaste, soap, and other “must-have” products even after the price hikes. (By the way, foreign currency exchange rates also impacted the revenue numbers substantially.)

More importantly, Colgate has said it expects continued expansion in its profit margins for the rest of the year, helped by lower commodity costs. In other words, it expects to pay cheaper prices for some of the raw ingredients used in its products. Yet those price hikes will stay in place!

During Colgate’s earnings conference call, the company’s CEO, Ian Cook, went on to say that he is comfortable with analysts’ current expectations for full-year per-share earnings of $4.25.

You know what’s crazy? I heard some chatter that Wall Street was disappointed because the company didn’t officially raise its guidance.

How quickly psychology shifts after a market rally!

A few months ago, everyone would have been thanking their lucky stars that a U.S. company was turning a profit at all. Now, they’re unhappy with consistency from the stalwarts and cheering hype-laden forecasts from riskier firms.

Some Street analysts at least saw a few rays of light. For example, Connie Maneaty from BMO Capital Markets raised her rating on CL to “outperform” and boosted her target price to $85 from $70. Barclays analyst, Lauren Lieberman, also hiked her target price to $78. Other analysts maintained their opinions and basically said the stock is fairly valued around its current range.

So What Do I Think About Colgate Right Now?

By my comments so far, you can probably tell that I’m not worried about the volume decline very much. And that’s true. I’m far more impressed by Colgate’s achievements in terms of price hikes, margin improvement, and profit growth.

I’d also like to point out that the company’s dividend track record is absolutely stellar. Colgate has raised its payment for 46 years straight — including the latest increase that came back in February 2008, when many other companies were cutting or suspending their payments.

And get this — CL has paid dividends every year since 1895!

So what about the current price action?

In my opinion, it’s a case of “too far, too fast” … and everyone is simply using the earnings release as a reason to take the stock down a notch or two.

Take a look at this daily chart of the stock and you’ll see what I mean:

As you can see, the shares really started moving sharply right around the time I recommended them in Dividend Superstars. (No, I’m not suggesting I had anything to do with the move!)

From that point on, they pretty much continued going up in a straight line, greatly outperforming most other consumer staples stocks during the same period.

Therefore, I think a retracement is natural and nothing to worry about.

In fact, if you look at an even longer-term chart, you’ll see that the stock spent much of 2007 consolidating in the mid 60s. Then it began gyrating more wildly through the turbulence of 2008 and 2009 …

Bottom line: Fundamentally speaking, the company is on solid ground. And the current price movements are well within expected technical action.

More importantly, Colgate is a prime example of the stocks I’ve been talking about here in Money and Markets lately. Defensive firms that can still benefit from resumed global growth. Companies that have strong worldwide brands. And shares that reward investors with solid, rising dividend payments.

Is now the time to jump into Colgate’s shares? I’m not saying it is. Only you can decide what’s right for your portfolio … and a continued pullback could certainly provide a more attractive entry point. But I certainly think Colgate is a good example of the kind of stocks you want to own.

And if you’re a Dividend Superstars subscriber and you got into the stock back in the 50s, I think you should just ignore the choppy trading … let those dividends keep rolling in … and be glad that you own quality companies that can do well no matter what happens next.

Best wishes,

Nilus

P.S. Please remember that the price of Dividend Superstars is going up starting September 1. If you want to get in at the charter rate of just $39 a year, I urge you to join me right now. Already a subscriber? Renew here to lock-in your current rate forever.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates
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