Colgate-Palmolive Stock: New Woke Agenda May Hurt Shareholders (2024)

Colgate-Palmolive (NYSE:CL) shareholders have been left in the dust over the last few years as the rest of the stock market has soared. While shareholders reaped spectacular returns for decades in the past, the stock price has only risen 5.7% compared to 53% for the S&P 500 since my July 2019 article when I recommended selling CL stock. Colgate's unimpressive income reports are even worse when you actually analyze the numbers. Part of the problem, in my opinion, is management and the current board of directors, but the reality is that they are just treading water because most of their sales to domestic and foreign markets have already reached close to their full potential. Their relatively new "woke agenda" is making it harder to improve financial results.

Relative Total Return Performance

Colgate-Palmolive generated very impressive total returns from the early 1950s until a few years ago. They were one of the truly outstanding consumer stocks that expanded from the US to foreign countries to achieve long-term growth. Investors often bought CL as a defensive stock against economic downturns, but now the stock has effectively plunged in price compared to the S&P 500 over the last few years. The company may not be hurt by any future economic decline, but they also don't seem to be no longer capable of gaining during strong economic growth.

Colgate-Palmolive's Total Return Compared to Procter & Gamble (PG) and S&P 500

Looking Behind the Reported Numbers

For years, reported numbers show no real growth and I doubt there will be much improvement in the near future. For example, income before income taxes was $3.874 billion in 2012 and $3.647 billion in 2020. This decline is even worse if the figures are adjusted for inflation. Using the CPI 19.6% inflation rate since 2012, the 2020 figure of $3.647 billion is only $3.049 billion. Even the reported income before taxes for the nine months for this year of $2.763 billion is actually a decline of $163 million from $2.753 in 2020 instead of a $10 million increase when adjusted for inflation of 5.39% for September 2020 to September 2021.

Source: Various 10-K reports

Current reported numbers compared to numbers a number of years ago are better not because of some improvement in their business model or operations, but because the U.S. tax rate was reduced from 35% to 21%. In 2012, the income tax rate on their GAAP income statement, which is not the same as their actual IRS filing statement, was 32.1%. In 2020 it was 21.6%. For the sake of discussion, if the 2012 tax rate of 32.1% was used in 2020, EPS would be $2.70 instead of $3.15. President Trump's tax rate reduction legislation makes Colgate's management look, but they had nothing to do with the positive impact it had on their reported income.

Since 2008 the Federal Reserve has kept interest rates artificially low (I consider these actions by the Fed as a massive unlegislated tax and wealth transfer from wealthy debt holders to borrowers, but that is not the subject of this article.) Like many other corporations, Colgate has benefitted by these low interest rates. Their interest expense in 2020 on a total of short-term and long-term debt of about $7.60 billion debt was $164 million or approximately 2.15% (Note: they filed a 0.30% 2029 unsecured note registration earlier this month.) Looking at historical interest rates for AA corporate issuers at the chart below, I feel that a more "normal" interest rate would be about 300 basis points higher - 5.15%.

Source: FRED-Bank of America

Using 5.15% average interest rate instead of their actual average borrowing rate in 2020 of 2.15%, EPS before income taxes would be about $0.34 lower or about $0.27 lower after income taxes using the 21.6% tax rate in 2020.

For years Colgate has had a program to repurchase shares, which I have always strongly opposed. These repurchases have reduced the number of outstanding shares, which increases the reported earnings per share, but these increased reported earnings are not based on an actual improvement in operating results. Using the number of CL shares outstanding at the end of 2012 of 935.7 million shares instead of the approximately 855 million average number of shares in 2020 and adding back the after income tax interest expense of $129 million in 2020 (I am assuming that they would reduce all their debt with the cash used since 2012 to repurchase shares) their EPS in 2020 would be $3.02 instead of the reported $3.15.

While none of these issues are dramatic, collectively they demonstrate the numbers are not really as strong as initially reported. Many investors are aware of these problems, which could help explain the relatively poor stock price performance over the last few years.

Shares Trade On Their Dividend Yield

Colgate trades on its current dividend yield and the expectation of continued dividend increases. Over the years, Colgate has had a very impressive history of dividend increases. In 1996 total dividends were $0.235, adjusted for stock splits, compared to $1.79 this year. Adjusting the $1.79 for inflation using the CPI increase over the same period results in about a $1.00 adjusted dividend in 2020 or over 4 times the dividend amount in 1996. Given their stagnant operating model over the last few years, it is highly unlikely that Colgate will be able to duplicate these results. I feel the company will be lucky to keep up with inflation when declaring dividends in the future.

I do not think that the current inflation problem is only temporary, especially because labor costs will rise sharply next year to reflect the annual cost of living adjustments-COLAs that are part of many employment agreements. Once high inflation starts, it is very difficult to get under control. This continued high rate of inflation most likely will result in much higher interest rates. Currently, real interest rates are negative, which can't continue very long before either the rate of inflation drops sharply or interest rates go up. Since CL stock trades on its yield, higher interest rates will have a negative impact on the stock price. This is a problem faced by many other companies that trade on their dividend yields.

The company's total cash dividends of $1.654 billion total in 2020 was a reasonable 61% of $2.695 billion net income, but that percentage is actually misleading. If the amount of cash spent on repurchasing CL stock of $1.476 billion is included, the total percent is more than 100% of net income. In the first nine months of 2021, Colgate paid $1.516 billion in dividends and repurchased $964 million worth of CL stock compared to $2.018 billion net income. So the total payout to shareholders continues to be over 100% this year

Colgate can't continue to increase dividends without long-term growth. Most of their growth in the past has come from rapid growth in developing countries, but now they have reached close to their maximum potential. In addition, some of their products, such as new toothpastes, are just competing with their existing ones and there are not enough net gains to cover the R&D expenses to create the new products or the extensive advertising needed to make customers aware of them. They have tried to grow by buying new brands like Laboratoires Filorga Cosmétiques. The problem is that they grossly overpaid ($1.7 billion) for that brand. It is interesting to note management has not bragged how well Laboratoires Filorga Cosmétiquess has done since it was bought in 2019. That may be because they have performed poorly because a major percentage of their upscale face cream sales comes from booths in airports that were impacted by the reduced number of flying passengers.

I am not expecting any dividend cuts in the near future and I think the board will be more likely to reduce future repurchases instead of not increasing annual dividends. I am not sure, however, if they are willing to continue to increase their long-term debt to have such a high shareholder payout.

Their New Woke/Equity Agenda

Usually, politics are not included in articles because of Seeking Alpha's policies on content, but Colgate-Palmolive has become so involved in political correctness that it has impacted CL investors-a negative impact, in my opinion. Earlier this month the company posted this tweet: "Colgate has issued our first Sustainability Bond! The net proceeds from our €500MM 0.300% Senior Notes due 2029 will support Colgate's sustainability ambitions to drive social impact, help millions of homes, and preserve the environment." I am not asserting that they should not try to be better corporate citizens, but I feel that their primary function is still to maximize profits for their shareholders and not to become some idealistic vehicle for a worldwide social restructuring. This €500 million note is a very significant amount of money and balance sheet liability.

Their 2020 10-K stated as their policy to "support minority and women-owned suppliers to enable success of diversity-owned businesses; and promote dialogue around diversity, equity and inclusion to increase awareness and advance the culture change to achieve our vision". Based on that statement and various other statements, it seems that Colgate may not currently, as a matter of policy, only buy from suppliers that offer the best value/lowest prices, but they now include other factors, such as race and sex of the owners of the potential suppliers. If the price/value is no longer the primary factor selecting a supplier, this may result in Colgate paying a higher price for their supplies. Could this also mean that Colgate-Palmolive's board of directors has voted for a policy that effectively discriminates against non-minority and male-owned suppliers, but effectively subsidizes minority and women-owned businesses with shareholders' money?

I personally do not want to use my investment money for some woke political agenda. This is one of the major reasons why I sold my CL stock a few years ago after owning CL shares for decades.

Conclusion

There are a number of reasons why I still consider CL stock a sell. First, there are many problems with their reported numbers, which I covered in this article, that have made operations appear stronger than they actually are. Second, I have concerns about the direction the board is taking Colgate-Palmolive. Based on statements included in their filings, it seems that the board has shifted from maximizing profits for shareholders to pandering to a woke agenda that could have a negative impact on shareholders.

I am also expecting a return to a more normal interest rate level that most likely will have a negative impact on Colgate's stock price because it usually trades on a competitive basis with bond yields. In addition, I feel that the entire stock market is currently overpriced.

B.A. in Economics; M.S. in Finance. I usually write about distressed companies and companies in Ch.11 bankruptcy. I am semi-retired after spending decades in investments.