Colgate-Palmolive (NYSE: CL) is not a value compared to peers and it isn’t the highest-yielding dividend stock in the consumer staples universe but neither is it the most expensive or lowest yielding. Along with that, the outlook for margin improvement is brightening and that is good news for investors looking for capital appreciation and yield.
Colgate-Palmolive Gets Upgrade On Firming Outlook
Colgate-Palmolive has been working hard on a portfolio realignment that is producing growth, but inflation has been cutting into the bottom line. While inflation is still present the company’s efforts to mitigate those impacts are on the verge of paying off and should drive solid results in the coming quarters. Based on the recent upgrade from Wells Fargo (NYSE: WFC), it looks like the analysts are ready for the change and could easily drive the stock higher over the next several quarters.
"We think being positive CL is now (and has been) consensus among many investors. We're not exactly there—EPS was still maintained down MSD this year, and much has to go right for this recovery to unfold into next year; however, unfold it may, and we are specifically becoming more comfortable with a brewing gross margin story at CL,” said Wells Fargo analysts Chris Carey when he upgraded the stock to Equal Weight and raised the price target to $80. His target is shy of the Marketbeat.com analyst consensus of $84, but the takeaway is bullish. The consensus target is holding steady over the past year and has an upward bias in the near term.
As far as the value goes, Colgate-Palmolive is trading at roughly 26X its earnings outlook compared to 35X and 28X for Clorox (NYSE: CLX) and Church & Dwight (NYSE: CHD) and only 15X for Kraft-Heinz (NASDAQ: KHC), so there is some value. In regard to the dividend, the 2.4% yield is a safe payout and only 60% of the earnings even after 59 years of consecutive increases and near the middle of the range expected from the group. The highest-yielding, like Kraft-Heinz, pay close to 4.0% right now while the lowest, like Lamb Weston (NYSE: LW) pay less than 2.0%.
Colgate-Palmolive Beats And Raises Guidance
Colgate-Palmolive had a decent quarter despite the impacts of inflation. The company reported $4.48 billion in net revenue for a gain of 5.2% that beat the analyst consensus by 300 basis points. The gains were driven by a 9% increase in organic sales offset by divestitures and FX with reported growth in every division if not every operating region. On a regional basis, North America and Latin America, which each account for 22% of the net sales, grew by 6% and 12.5%, respectively, driven by volumes and pricing actions. Sales in Europe and Africa/Eurasia both contracted while Asia-Pacific grew by 3.5%. On a product basis, Colgate continues to dominate the global toothcare business with 39.6% of the toothpaste market share and 31.3% of the toothbrush market share.
Moving down to the income, the news is a little mixed, with gross margins contracting by 300 basis points and operating profit falling 11%. The good news is the decline was not enough to overcome the revenue strength, and there is guidance for margin improvement. On the bottom line, the $0.72 in GAAP and adjusted EPS fell 13% versus last year but beat the consensus by a penny. As for the guidance, the company upped its revenue growth target by 2% at both ends of the range, and estimated earnings would decline by mid-single-digits which is less than the analysts were looking for.
The Technical Outlook: Colgate-Palmolive Moves Up With A Range
Shares of Colgate-Palmolive are range bound but moving up with that range in the wake of the earnings report. The price action started the week up more than 2.0% and it looks like it could move up to the top of the range near $85.50. A move above that level would be bullish for the market and could lead the stock up to the $98 level. 
