Is This the Best Consumer Staple Stock to Buy?

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Consumer staples stocks have a lot to offer investors. Their products are purchased no matter the prevailing economic conditions, which means stable financial results in good times and bad. One such company is Colgate-Palmolive (NYSE: CL), whose namesake brands of toothpaste and soap can be found in millions of households across the globe.

After rallying nearly 20% to begin the year, Colgate-Palmolive has come off its recent highs. Does the stock now represent a buying opportunity? Or are there better consumer staples stocks out there?

Not the only game in town

As you can imagine, Colgate-Palmolive isn’t the only consumer staples stock getting attention from the investing community. Industry juggernauts Procter & Gamble (NYSE: PG) and Clorox (NYSE: CLX) compete with Colgate-Palmolive and share many of the qualities that make Colgate-Palmolive a great stock to own for the long-term.

Namely, each of these stocks rewards their investors with stable financial results, and in turn, dependable dividend payments every quarter. Each stock carries a dividend yield that bests the yield on the broader market. Whereas the S&P 500 Index yields roughly 2%, Clorox and Procter & Gamble yield 3.4% and 3.1%, respectively. Colgate-Palmolive’s yield trails its two industry peers, at roughly 2.5% annualized.

Even better, each of these companies is famous for not only paying a strong quarterly dividend, but actually raising dividends on an annual basis.

Consider the track records of dividend excellence these companies hold. P&G recently increased its dividend by 7%. This year marks the 123rd in a row of consecutive dividend payments since the company’s incorporation in 1890. Furthermore, P&G has increased its dividend for 57 years in a row.

P&G’s competitors aren’t far behind in that regard. Clorox recently gave its investors a healthy 11% pay raise. Clorox has an impressive dividend track record of its own: total annual dividends paid to Clorox shareholders have increased each year since 1977.

Colgate-Palmolive recently bumped up its shareholder payout by 10%. Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895 and increased payments to common shareholders every year for 51 years.

Companies can only maintain such impressive dividend track records by holding strong brands. To illustrate, P&G’s flagship products include Gillette razors, Pampers diapers, Bounty paper towels, Tide laundry detergent, Crest toothpaste, and Head and Shoulders shampoo.

Meanwhile, Clorox has many market-leading brands of its own. The company sells its products in more than 100 countries and has many household brands including its namesake bleach, Kingsford charcoal, Pine-Sol cleaner, and Glad trash bags. Nearly 90% of Clorox’s brands hold the No. 1 or No. 2 market-share positions in their categories.

Stability comes with a high price

Even though Colgate-Palmolive has declined slightly after such an impressive rally, the stock still trades for 23 times trailing earnings. This multiple is higher than both the market’s multiple and the multiple enjoyed by Colgate-Palmolive’s competitors.

The S&P 500 Index holds a P/E multiple in the mid-teens, and even Clorox and P&G change hands for 19 times and 17 times trailing EPS, respectively.

Moreover, the argument can be made that Colgate-Palmolive’s underlying growth doesn’t support such a lofty valuation. Colgate’s full-year 2012 revenue and diluted EPS grew 2% and 4%, respectively. It stands to reason that soap and toothpaste aren’t exactly major growth industries, and as a result, investors need to decide whether they’re willing to pay such a high premium for relatively modest growth.

While Colgate-Palmolive is a fantastic business, it trades for a significant premium to P&G and Clorox and offers a lower dividend yield for new investors.  As a result, I'd wait for a meaningful pullback before jumping into Colgate-Palmolive shares.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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