Colgate-Palmolive (NYSE: CL)
is set to report its Q3 2020 earnings tomorrow. A surging number of COVID-19 cases and uncertainty surrounding the upcoming election has the S&P 500 approaching correction territory – defined as a 10% drop.
Of course, if recent history is any guide, the market will quickly turn things around and set fresh all-time highs. But you can’t go wrong putting some of your money in a safe company, and few are safer than Colgate, a household and personal products giant.
CL shares had held up reasonably well in the early stages of the market’s pullback, but took a dive – by Colgate’s standards – yesterday.
The drop gives you an opportunity to buy CL at a discount ahead of earnings – which I expect to be solid.
P&G’s Numbers Bode Well for Colgate
Proctor & Gamble (NYSE: PG), one of Colgate’s closest comps, released its fiscal first quarter numbers last week. Not only did P&G beat estimates for its most recent quarter, but it also raised its full-year guidance.
P&G CFO Jon Moeller said, “We do expect that there is some stickiness to new habits that are being formed and new awareness that's been raised. It's hard for us to see in our interactions with consumers that we're going to snap back and revert to the same attitudes and the same behaviors that we had collectively pre-COVID.”
This should be music to P&G investors’ – and by extension, Colgate investors’ – ears. The pandemic-related boost that companies like P&G and Colgate have experienced is well-established. But the question has been: Will the gains stick post-pandemic? P&G thinks so. And I agree with that assessment. We’re seven months into the pandemic; that’s a lot of time to form lasting habits – and this pandemic isn’t over by a long shot.
Modest Expectations for Colgate
In Q1 2020, sales increased 5.5% yoy and profits soared 28% yoy. Colgate, like many of its peers, benefited from pantry-loading in Q1. So, it wasn’t much of a surprise when Colgate’s sales increased just 1% yoy and earnings jumped 9% yoy in Q2.
For Q3, the analysts see Colgate’s revenue increasing 1.1% yoy and earnings decreasing 1.4% yoy. These numbers seem a bit too conservative, and a beat may be in the cards.
A question going into the Q3 report is: Will the company issue guidance going forward? Colgate didn’t issue guidance when it released its Q2 results, citing the “continued uncertainty surrounding the business impacts from COVID-19 and related macroeconomic volatility.”
While it’s certainly possible that Colgate won’t issue guidance tomorrow, an increasingly certain business environment, coupled with P&G’s confident outlook, means it is very possible that Colgate will issue strong guidance. If it does, I could see shares jumping in response, but if not, I think investors would shrug it off.
The Dividend is as Safe as They Come
The dividend kings, as they are known, are a small group of companies that have increased their dividend for each of at least the past 50 years. Colgate easily qualifies, having increased its payout for almost 60 straight years. On top of that, Colgate has paid a dividend for 125 consecutive years.
The 2.28% yield isn’t going to make you rich, but as we move into a very uncertain winter it’s nice to know that if you invest in Colgate, your dividend is a pretty sure bet to increase.
How to Play Colgate
I would look to get into Colgate ahead of its Q3 earnings. The market isn’t expecting much from Colgate, and if we are in fact moving into a prolonged risk-off phase, that only makes Colgate more attractive.
Of course, Colgate is almost certainly not going to surge 10%+ on earnings; but even a smaller jump would be a nice way to kick off a long-term investment in an excellent company.
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