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The relative decline of Colgate-Palmolive Company (NYSE:CL) and its peers appears to have paused. Wall Street shrugged off news about the recall of Colgate’s Orabase and competing products. Now, Wall Street analysts have turned bullish on CL stock, as profit growth seems to have returned.
However, the no-moat status of Colgate-Palmolive remains and new competitors pose a serious threat to its core business. For this reason, I believe CL stock remains in danger despite its stability and consumer following.
CL Stock Sees Revenues, Net Income Again on the Rise
To be sure, the outlook for CL stock has shown improvement. As a result, an analyst upgrade from Argus sent the stock higher in Friday trading. Argus set its current price target on CL at $72 per share. This would amount to about a 12% increase from today’s levels.
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Due to the declines, the forward price-to-earnings (PE) ratio of the stock now stands below 20. Regarding historical PE ratios, this brings CL stock back to the PE ratios seen during the depths of the 2007-09 financial crisis. As a consumer defensive, CL stock and its peers experience relatively few negative effects from economic downturns. However, it also means that Colgate trades at half the multiple it saw in 2016.
Moreover, Wall Street believes the company will resume revenue growth over the next two fiscal years. This revenue growth should also bring sustained profit growth. Analysts predict profit growth in the mid- to high-single digits in each of the next three fiscal years.
Regarding dividends, CL stock stands as one of the current 53 dividend aristocrats trading on the market today. Colgate has increased its dividend every year since 1964 and has paid dividends for over 100 years. Those who buy today will receive a dividend of 42 cents per share every quarter. That amounts to a dividend yield of about 2.6%. With growing profits and a long tradition of dividend increases, dividend growth is almost certain to continue.
Competitive Threats Remain for CL Stock
Despite these positives, I still think investors should remain cautious on Colgate stock and the sector as a whole. Although the outlook has recently improved, this sector saw several years of revenue declines. As a result, CL stock trades at levels last seen in 2014.
The trends that have caused these declines remain and will likely intensify. Products such as Colgate toothpaste or Palmolive dishwashing liquid are highly commoditized products that peers can easily copy. Hence, name recognition and control of shelf space constitute their moat. This also holds true for peers such as Procter & Gamble Co (NYSE:PG), Kimberly Clark Corp (NYSE:KMB), and Unilever NV ADR (ADR) (NYSE:UN).