Colgate-Palmolive Company (CL), Exxon Mobil Corporation (XOM): Wait for These Overpriced Dividend Stocks to Fall

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In a previous article entitled A Dividend Watchlist for the Pullback I put a buy target on three currently overpriced dividend stocks and suggested keeping a watchlist to take advantage of the current pullback in high-yield stocks. Today I’m introducing my Dividend Growth Watchlist, which you can view at any time by going here, and which includes those three previous stocks as well as three more dividend stocks I’ll analyze today. This should make it easier to track which dividend stocks become attractively priced.

All three stocks I’ll look at today are dividend aristocrats, stocks that have increased the dividend for at least 25 consecutive years.

A minty fresh dividend?

Colgate-Palmolive Company (NYSE:CL) is best known for its namesake toothpaste, but the company makes some other products as well. The Irish Spring brand of bar soap, Speed Stick deodorant, and Softsoap hand soap fill out the company’s personal care product line. In home care products the company sells Palmolive dishwashing liquid, AJAX cleaners, and Suavitel fabric softener. And a bit out of its core competency, Colgate-Palmolive Company (NYSE:CL) also sells a few brands of dog and cat food such as Science Diet.

Most of these are strong, established, well known brands, and the company certainly has an economic moat in the oral care market. The stock currently yields about 2.3%, quite low for a mature company like Colgate-Palmolive Company (NYSE:CL). The dividend has grown at a reasonable clip over the past decade, with annualized growth of 11.7% over that period. This is faster than other similar companies, like The Clorox Company (NYSE:CLX) for example, but the yield is also far lower.

While the dividend has nearly tripled over ten years the company’s free cash flow hasn’t quite doubled, meaning that the payout ratio has expanded. In 2003 the payout ratio as a percentage of the free cash flow was just 34.8%, growing to 44.5% by 2012. This is actually still fairly low and has more room to expand. Until the payout ratio reaches the mid 50’s I wouldn’t be concerned.

The payout ratio was partially kept in check by share repurchases, reducing the share count by 15.4% over the past decade. Without these buybacks the payout ratio would be 52.6%, significantly higher than the current value. These repurchases should continue, reducing the growth of the payout ratio and making room for more dividend growth.

I think that the past growth rate of about 11% can likely continue, at least for a while. I’ll do a simple dividend discount model calculation to estimate the fair value of a share of Colgate-Palmolive Company (NYSE:CL) given this assumption.

The fair value of a share of Colgate-Palmolive Company (NYSE:CL) is about $53, 10% below the current market price. The stock has fallen from $62 already, but another 10% decline seems unlikely anytime soon. Nevertheless, I’ll put Colgate on the watchlist with a $53 buy target.

Big Oil, not so big dividend

Exxon Mobil Corporation (NYSE:XOM) isn’t my favorite big oil stock, partially because it’s so big and partially because it has a lower dividend yield than most of its peers. The price will certainly need to come down for the stock to be a good investment. After a 10.5% dividend hike in May the stock currently yields 2.76%, not quite as high as Chevron Corporation (NYSE:CVX).

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