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Will Investors Smile After Colgate Split?

Tuesday - 3/19/2013, 9:20pm  ET

Fools know the value of a stock split: zero. It's a non-event. Instead of a $20 bill in your wallet, you now have two $10 bills. So if they mean nothing, why do them? There are a few reasons, none of which has anything to do with whether the stock is a good investment. Here are the usual ones:

  • To make the stock look cheap.
  • To increase liquidity.
  • To meet stock-exchange listing requirements.
  • To express a bullish management sentiment.

Regardless of the reason, markets tend to view splits as positive events, and a company's shares can get a short-term boost from the news. But if the company isn't a good, long-term business, it doesn't matter if its shares split, or whether you buy them before or after.

A split decision
Toothpaste maker Colgate-Palmolive intends to split its shares 2-to-1 on April 23 while raising its dividend almost 10% to $0.68 per share, twin moves that will undoubtedly leave shareholders smiling.

Shares are up 20% over the past year, recently hitting a record high of $116 a stub, as a robust business featuring growth in virtually every market boosted sales to $4.3 billion in the fourth quarter, a 2.5% increase from the year-ago period. Only in Europe did they remain flat.

The only blot on its record really was Colgate's pet-food business, Hill's Pet Nutrition, which accounted for 13% of total sales but saw a 1% drop in sales as pet owners shied away from lab-developed food in favor of going natural. 

As PetSmart can tell you, "pet parents" are increasingly concerned about what their "pet babies" are eating and are looking for food options that mimic human diets. The super-premium category is one of the driving forces behind the pet shop's own growth trajectory and is behind its decision dedicate even more aisle space to the niche. As the humanization of pets gains momentum, consumers become more tolerant of the higher prices they have to pay, padding margins for producers and retailers alike.

A rose is a rose
Colgate was finally forced to give in to the trend, and it completely reformulated the Hill's brand last year. Facing declining market share, it no longer prominently displays the "Science Diet" name on the label, instead featuring the new "Nature's Best" brand along with the meats and natural ingredients.

But just because it's gone natural, too, that doesn't mean it's going to be an easy sell. Pet owners are creatures of habit and tend to remain "sticky" when it comes to pet food for fear of disturbing Fluffy's dietary system. Having once lost a customer to Blue Buffalo, Nestle's Purina One Beyond, or even PetSmart's own proprietary line of super-premium food, Colgate will be hard-pressed to win him or her back.

Brushing up on growth
While a significant portion of total revenues, pet food is still second to toothpaste, and it's there that Colgate investors get their toothy grin. The toothpaste maker owns almost 45% of the global toothpaste market, and it controls a third of the toothbrush market as well. Only in the U.S. does Procter & Gamble   have the lead, having recently regained the top spot with Crest. The 3D White brand alone owns a nearly 9% share of the U.S. oral-care market. 

South of the border
But Colgate is enjoying volume increases in just about every country except Venezuela, where strongman Hugo Chavez wrecked the economy with his monetary policy. The currency devaluation he effected is a difficult obstacle to overcome, but now with his death, the prospect for a more moderate replacement that allows Venezuela to experience the kind of growth Colgate has seen elsewhere in Latin America becomes more of a reality.

Latin America accounts for 18% of its revenues, and organic growth was up 4% during the quarter. Where it saw volume gains in Brazil and Central America, the problems of Venezuela overshadowed them and wiped them out, so it's not a minor concern.

Split the difference
Regardless, we have a company that operates a business essential to everyone's health and well-being and is fortunate to own one of the best-selling, most-trusted names in the industry. Consumers will keep going back to the store to pick up more toothpaste week after week, creating a coin-drop business that can grow and grow.

Despite the gains it's made, however, Colgate is no more expensive than P&G, and they're running neck and neck in performance. Colgate's stock split, however, will put its share price on par with its rival and will give investors at least a psychological rationale for buying its stock instead.

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