Colgate-Palmolive Co. (NYSE:CL)

Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

Intrinsic Stock Value (Valuation Summary)

Colgate-Palmolive Co., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 8.11%
0 DPS01 1.75
1 DPS1 10.86 = 1.75 × (1 + 520.49%) 10.04
2 DPS2 53.41 = 10.86 × (1 + 391.83%) 45.70
3 DPS3 193.95 = 53.41 × (1 + 263.16%) 153.51
4 DPS4 454.81 = 193.95 × (1 + 134.50%) 332.99
5 DPS5 481.33 = 454.81 × (1 + 5.83%) 325.98
5 Terminal value (TV5) 22,399.71 = 481.33 × (1 + 5.83%) ÷ (8.11%5.83%) 15,170.21
Intrinsic value of Colgate-Palmolive Co.’s common stock (per share) \$16,038.43
Current share price \$81.44

Based on: 10-K (filing date: 2021-02-18).

1 DPS0 = Sum of the last year dividends per share of Colgate-Palmolive Co.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.03% Expected rate of return on market portfolio2 E(RM) 11.89% Systematic risk of Colgate-Palmolive Co.’s common stock βCL 0.62 Required rate of return on Colgate-Palmolive Co.’s common stock3 rCL 8.11%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rCL = RF + βCL [E(RM) – RF]
= 2.03% + 0.62 [11.89%2.03%]
= 8.11%

Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

Colgate-Palmolive Co., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Dividends 1,502  1,472  1,448  1,405  1,380
Net income attributable to Colgate-Palmolive Company 2,695  2,367  2,400  2,024  2,441
Net sales 16,471  15,693  15,544  15,454  15,195
Total assets 15,920  15,034  12,161  12,676  12,123
Total Colgate-Palmolive Company shareholders’ equity 743  117  (102) (60) (243)
Financial Ratios
Retention rate1 0.44 0.38 0.40 0.31 0.43
Profit margin2 16.36% 15.08% 15.44% 13.10% 16.06%
Asset turnover3 1.03 1.04 1.28 1.22 1.25
Financial leverage4 21.43 128.50
Averages
Retention rate 0.39
Profit margin 15.21%
Asset turnover 1.17
Financial leverage 74.96

Dividend growth rate (g)5 520.49%

Based on: 10-K (filing date: 2021-02-18), 10-K (filing date: 2020-02-21), 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-23).

2020 Calculations

1 Retention rate = (Net income attributable to Colgate-Palmolive Company – Dividends) ÷ Net income attributable to Colgate-Palmolive Company
= (2,6951,502) ÷ 2,695
= 0.44

2 Profit margin = 100 × Net income attributable to Colgate-Palmolive Company ÷ Net sales
= 100 × 2,695 ÷ 16,471
= 16.36%

3 Asset turnover = Net sales ÷ Total assets
= 16,471 ÷ 15,920
= 1.03

4 Financial leverage = Total assets ÷ Total Colgate-Palmolive Company shareholders’ equity
= 15,920 ÷ 743
= 21.43

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.39 × 15.21% × 1.17 × 74.96
= 520.49%

Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$81.44 × 8.11%\$1.75) ÷ (\$81.44 + \$1.75)
= 5.83%

where:
P0 = current price of share of Colgate-Palmolive Co.’s common stock
D0 = the last year dividends per share of Colgate-Palmolive Co.’s common stock
r = required rate of return on Colgate-Palmolive Co.’s common stock

Dividend growth rate (g) forecast

Colgate-Palmolive Co., H-model

Year Value gt
1 g1 520.49%
2 g2 391.83%
3 g3 263.16%
4 g4 134.50%
5 and thereafter g5 5.83%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 520.49% + (5.83%520.49%) × (2 – 1) ÷ (5 – 1)
= 391.83%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 520.49% + (5.83%520.49%) × (3 – 1) ÷ (5 – 1)
= 263.16%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 520.49% + (5.83%520.49%) × (4 – 1) ÷ (5 – 1)
= 134.50%