Colgate-Palmolive Stock: Brushing Up Profits In Q4 2023 (NYSE:CL)

Colgate-Palmolive Company (NYSE:CL) has just announced its Q4 2023 earnings, marking the end of a year that saw growth in both the top and bottom lines. Despite flat volume growth, the strength of the company’s brand has enabled it to boost its top line. With an ROA of 14.03%, significantly outperforming the consumer staple industry’s average of 4.64%, the company has demonstrated its ability to generate profits effectively. This year, Colgate-Palmolive has not only increased its top and bottom lines but also improved its cash flow generation. The company has consistently achieved or exceeded its long-term goal of delivering 3 to 5% annual sales growth for the past five years.

The company has increased its dividend for the 61st consecutive year, indicating its robust financial health and commitment to shareholder returns. The company is well-positioned for future growth with substantial funds available for reinvestment. It has built the globe’s second most popular grocery brand, Colgate and has significant growth potential in the billion-dollar pet care industry through Hill’s. Given that the company’s forward price-to-earnings ratio is still below its five-year average, it might be a good time for long-term investors to consider a bullish stance on this stable, rewarding, and growing business.

Company overview

Colgate-Palmolive is a global company that has been around for over 200 years. It is the fifth largest consumer goods company in terms of market capitalization, with an annual revenue of over $19 billion and a presence in more than 200 countries. The company focuses on four core categories and has an impressive lineup of billion-dollar brands. One of its most popular brands is Colgate, which is the world’s second most popular grocery brand after Coca-Cola (KO). In the United States, Colgate’s year-to-date market share stands at 33.7% for toothpaste and 41.1% for manual toothbrushes.

Colgate-Palmolive’s strong brand recognition enables the company to upsell basic goods. This strategy was evident in Q4 2023 when, despite flat YoY volume sales, higher prices led to a 7% YoY growth in revenue. Additionally, easing inflation has improved the company’s margins. To maintain this brand strength, Colgate-Palmolive significantly invests in advertising. In fact, advertising expenses saw a 19% YoY increase, and the company plans to invest even more in FY 2024.

For growth, the company is investing heavily in digital, data, and analytics. It has set a long-term sales growth target of 3 to 5% and expects to increase its gross profit margin, aiming for mid to high-single-digit earnings-per-share growth. Furthermore, the company is keen on expanding its Hill’s brand, its pet nutrition business, which currently has minimal market penetration. The pet care market is expected to grow at a CAGR of 8.0%, reaching $253 billion by 2030. Colgate-Palmolive’s strategies for this segment include reaching more consumers, increasing awareness, and enhancing conversion. Differentiated marketing approaches and product offerings are expected to accelerate growth in the pet care segment.

Q4 2023 earnings highlight

In Q4 2023, Colgate-Palmolive exceeded EPS expectations, reaching $0.87, and achieved a 7% YoY revenue growth. This was driven by price increases, with volume remaining flat YoY. Regionally, growth was led by Latin America (16.5%) and Africa/Euroasia (17%), with North America and Asia Pacific seeing smaller increases. The company’s operating profit rose by 14% YoY, with strong performances in Europe and Latin America. Despite a decline in Africa/Euroasia, North America saw a 19% YoY increase in operating profit. These improvements were achieved through reduced overheads, price increases, and increased advertising investment.

We can observe an improvement in YoY cash flow from operations and leveraged free cash flow. This enhancement puts the company in a solid position to reinvest in the business, compensate investors, and pay off liabilities.

If we examine the balance sheet of the company, we can see that it currently has total cash of $1.15 billion, which represents an increase from $950 million the previous year. Additionally, while the total debt remains high at $8.55 billion, it has been significantly reduced from $9.27 billion in FY2022. Furthermore, the company has a current ratio of 1.2, indicating that it can cover its short-term liabilities.

Valuation

At present, Colgate-Palmolive is trading at a forward P/E ratio of 23.87x, based on the FY24 consensus EPS estimate of $3.47. This is inching closer to, yet still remains below, its 5-year historical average P/E of 24.71x. The company has showcased the strength of its brand with a 7% YoY revenue growth, primarily driven by strategic price adjustments rather than volume increases. Notably, Colgate-Palmolive is planning to boost its advertising spend and invest in its digital outreach, data-driven strategies, and analytics. With the expected easing of inflation, I foresee an improvement in margins for FY 2024. Moreover, the company offers a dividend yield of 2.32%, making it attractive for income-seeking investors.

Risks

Investors should be aware of the risks Colgate-Palmolive faces a global player. The company’s operations are subject to geopolitical unrest, foreign exchange fluctuations, and consumer challenges. The anticipated softening of sales in China could impact the company’s financial performance. Furthermore, the numerous political elections scheduled for 2024 could introduce additional uncertainties. These factors could potentially hinder its ability to achieve its projected growth for both its top and bottom lines.

Final thoughts

Colgate-Palmolive’s strong FY2023 performance and consistent sales growth make it an attractive investment. Its impressive 14.03% ROA and 61 years of increased dividends highlight its financial health and commitment to shareholders. With ample reinvestment funds and a below-average forward price-to-earnings ratio, it could be a good time for long-term investors to consider this stable and growing business. Therefore, I recommend a bullish position on this stock.