Should Passive Income Investors Buy Colgate Palmolive Stock?

SUMMARY

Parkev Tatevosian, CFA, evaluates Colgate-Palmolive as a dividend stock, highlighting its recent outperformance and risk profile. He maintains a medium conviction buy rating, citing strong capital returns and fair valuation despite modest dividend yield.

MAIN POINTS

• Colgate-Palmolive has outperformed the S&P 500 year-to-date with over 16% gains plus dividends. [0:00]
• The company’s revenue has grown to $20.8 billion, but profit margins have declined due to tariffs and consumer trade-down behavior. [1:00]
• Colgate-Palmolive boasts a high return on invested capital of 24% compared to a 7.1% weighted average cost of capital. [2:01]
• Despite a modest 2.28% dividend yield, the stock’s low beta of 0.32 indicates much lower volatility and risk than the broader market. [3:01]
• The forward price-to-earnings ratio is 22.7, about 10% higher than at the start of 2026, but the stock appears undervalued based on discounted cash flow analysis. [4:01]
• Tatevosian reiterates a medium conviction buy rating for Colgate-Palmolive, considering its valuation and risk profile. [6:00]

DETAILED ANALYSIS

Colgate-Palmolive has demonstrated notable resilience and growth in the consumer staples sector, achieving a year-to-date share price increase of over 16% in addition to regular dividend payouts. This performance has surpassed the S&P 500 index, all while maintaining a lower risk profile, which is particularly attractive to passive income investors. The company’s revenue has expanded from approximately $15 billion in 2017 to $20.8 billion in the trailing twelve months, reflecting successful portfolio optimization through acquisitions and divestitures aligned with evolving consumer preferences.

However, profit margins have compressed, with operating profit margin declining from over 26% in 2017 to 21.9%, largely due to external pressures such as tariffs and a shift in consumer spending toward store-branded alternatives during periods of reduced disposable income.

A key strength lies in Colgate-Palmolive’s capital efficiency, as evidenced by a return on invested capital (ROIC) of 24%, significantly exceeding its weighted average cost of capital (WACC) of 7.1%. This favorable ROIC to WACC ratio underscores effective management and prudent capital allocation. While the trailing 12-month dividend yield of 2.28% is less competitive than current 10-year government bond yields, the potential for capital appreciation remains a distinguishing factor for equity investors.

The stock’s beta of 0.32 highlights its low volatility, offering stability and reduced downside risk compared to the broader market, which is particularly valuable for risk-averse investors.

Valuation metrics present a mixed picture. The forward price-to-earnings ratio of 22.7 is about 10% higher than at the start of 2026, though it remains below the mid-2024 peak and aligns with recent historical averages. Importantly, discounted cash flow analysis suggests the stock is undervalued, with a calculated fair value of $127 per share against a current price of $92.

Balancing these factors, the stock continues to be rated as a buy, with a medium conviction level, reflecting both its strengths and the tempered expectations due to recent price appreciation and ongoing market challenges.

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