Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Colgate-Palmolive Company (NYSE:CL) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 22nd of October, you won't be eligible to receive this dividend, when it is paid on the 15th of November.
Colgate-Palmolive's upcoming dividend is US$0.4 a share, following on from the last 12 months, when the company distributed a total of US$1.7 per share to shareholders. Based on the last year's worth of payments, Colgate-Palmolive has a trailing yield of 2.5% on the current stock price of $67.85. If you buy this business for its dividend, you should have an idea of whether Colgate-Palmolive's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Colgate-Palmolive paid out more than half (64%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Colgate-Palmolive's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Colgate-Palmolive has increased its dividend at approximately 8.0% a year on average.
The Bottom Line
Is Colgate-Palmolive an attractive dividend stock, or better left on the shelf? Colgate-Palmolive has struggled to grow its earnings per share, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear unsustainable. In summary, while it has some positive characteristics, we're not inclined to race out and buy Colgate-Palmolive today.
Curious what other investors think of Colgate-Palmolive? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.