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Colgate-Palmolive’s Stock Will Make You Smile

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At a time when the ongoing artificial intelligence revolution is getting all the attention, it’s hard for a consumer staple like Colgate-Palmolive (NYSE: CL) to capture much buzz. After all, there’s nothing terribly exciting about toothpaste, soap and pet food.

But as many of the most successful investors in history have proven time and again, it’s often the most unassuming businesses that prove to be the best long-term investments.

And few companies exemplify this better than Colgate-Palmolive, a true blue chip cash cow.

Interestingly, despite the company’s “boring” reputation, its share price has surged nearly 40% from its 52-week low back in October.

Chart: Colgate-Palmolive (NYSE: CL)

This serves as a reminder that while boring businesses may not always capture the limelight, their ability to generate steady cash flows – which then boost their share prices – should not be underestimated.

But the crucial question we must ask is whether the market has appropriately valued Colgate-Palmolive’s stock. To answer this question, let’s dive deeper into the company’s financials.

Colgate’s enterprise value-to-net asset value (EV/NAV) ratio of 108 is well above the average of just 6 for companies with positive net asset values. At first glance, that valuation may seem astronomically high, but a closer look at the company’s cash flow generation reveals that there’s a good reason for it.

Over the past four quarters, Colgate’s free cash flow averaged an astounding 157.2% of its net assets. That’s nearly 18 times higher than the 8.9% average among companies with similar financial profiles.

In other words, Colgate has been churning out cash relative to its assets at a rate that puts the overwhelming majority of businesses to complete shame. And the company has maintained this incredible level of cash generation consistently over the years.

The best part? Colgate still has plenty of room to grow.

In the first quarter of 2024, Colgate’s organic sales rose an impressive 9.8% year over year and net sales surpassed $5 billion. This growth was evident across all divisions and in each of the company’s four core product categories: oral care, personal care, home care and pet nutrition. Notably, both sales volume and pricing contributed positively to the top line.

This balanced, broad-based growth shows the enduring strength of Colgate’s brands. And despite its already strong market position, the company continues to invest heavily in its products, as evidenced by the 16% increase in its advertising spending during the quarter.

Looking ahead, Colgate’s management is optimistic about the company’s prospects. It just raised its full-year guidance for organic sales growth from 3%-5% to 5%-7%, and it expects double-digit earnings per share growth for the year.

Clearly, Colgate’s proven playbook of innovating across its core businesses, driving “premiumization” in high-growth segments and expanding into adjacent categories is resonating with consumers around the globe.

In a world filled with money-losing “story stocks” that are long on hype and short on cash flows, there’s something to be said for a battle-tested compounder with an unrivaled track record of rewarding shareholders.

The quality and consistency of Colgate’s cash flows more than justify its price tag. And with a dividend yield north of 2% and a streak of more than 60 consecutive years of payout hikes, it remains a quintessential “sleep well at night” stock.

The Value Meter rates Colgate-Palmolive as “Slightly Undervalued,” making it an attractive buy for investors who appreciate boring but profitable businesses.

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