In my previous posts, I covered business performance, product category and financial performance of Colgate Palmolive. (For previous part, click here, here and here)
In this part of equity research report, I am going to cover management quality and competition that Colgate Palmolive is facing.
Management Quality of Colgate Palmolive
How to judge whether the management of a company is good or bad?
Firstly, I would look at capital allocation skills. How do I decide whether the management has good capital allocation skills or not?
The number that will give you an answer to this question is Return on Equity. As we have seen in financial performance, Colgate Palmolive has earned ROE well above 40% for last 9 years and for last 4 years, it is 100%+. This shows the management is allocating capital very well where it can earn high return on equity. After all, management’s first function is—to maximize shareholder’s wealth.
Second point is whether there is any equity dilution in past 10 years?
Colgate Palmolive has not seen any equity dilution in past 10 years. However, the company split its share in 10 parts and made it Re.1 in 2008.
Third important point is remuneration or salary paid to the management.
In 2012, the company net profit was Rs.446.40 crores and the total remuneration paid to the Directors of the company stood at Rs. 15.44 Crores, which is 3% of net profit and not too high.
Fourth point is how the company is using its cash. For the last 10 years, company is consistently paying high dividend and its dividend payout ratio is well above 70%. Also, company is reinvesting cash into business with high return on equity. Also, the company is sitting on a lot of cash.
In addition to the points mentioned above other points like—steady sales growth, good profitability and cash flows, sharing profits with shareholders in the form of dividends and earning high return on capital—are positive.
In short, Colgate Palmolive has top quality management.
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Colgate Palmolive faces stiff competition from players like Hindustan Unilever and Dabur in Oral Care segment. Due to aggressive marketing, the competition is getting tough. Colgate is market leader with approximately 55% market share in toothpaste category.
Management in the past has focused on profitability and market share both, which is good for company like Colgate Palmolive. Increasing operating margins and market leader position in oral care segment justify the same.
In the next post, I will cover valuation part of Colgate Palmolive.
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