…I just added Colgate, Clorox, and Hershey to my own retirement portfolio watch list and consider them great choices for conservative income investors such as retirees. Let’s take a look at why these three dividend blue-chips deserve your consideration…and also what prices I’m personally looking for before adding these companies to my retirement portfolio.

1. Colgate (CL)

While the company has four main business segments, 47% of revenue comes from oral care, which is the core business upon which Colgate was founded 213 years ago in 1806. Today, the company operates in over 200 countries…[and] sells its oral care products in 78 countries.

 

(Source: CL investor presentation)

There are 10 main reasons I’m such a fan of Colgate:…

1. Colgate’s dividend safety is excellent, among the best on Wall Street. That’s courtesy of a reasonable payout ratio, backed by recession-resistant cash flow. Colgate has 56 consecutive years of dividend hikes to its name…[and] has proven its dividend reliability by paying uninterrupted dividends for 123 consecutive years.

2. Colgate is supported by a very strong balance sheet…the strongest of these three companies. Its borrowing costs are nearly equal to that of the US Treasury (about 2.9%) and almost 20 times lower than its industry-leading return on invested capital….

3. Among its peers, none has better global diversification. 48% of the company’s sales come from emerging markets, and the U.S. accounts for about 20% of revenue. This makes Colgate one of the best low-risk dividend stocks for those looking for exposure to emerging markets like China, India, and Latin America. These are countries whose economies are growing two to three times faster than those in developed markets…

(Source: annual report)

4. Colgate’s global market share in toothpaste is 42% (roughly three times its nearest competitor) and 32% in manual toothbrushes. Colgate’s success is due to multiple factors, one of which is targeting every price point, from just $0.05 in India to as much as $7.20 for ultra-premium toothpaste in the U.S.

 

(Source: Colgate investor presentation)

5. Another smart strategy Colgate has followed is building a highly trusted brand, not just with consumers but with medical professionals like dentists. Colgate is the world’s most dentist recommended toothpaste (42%), about twice its nearest rival (22%).

6. …Colgate purchased Hill’s Pet Nutrition in 1976 and is now the most recommended brand by Vets (32% for basic nutrition, 50% for sick pets). Pet food is a fast-growing (4.3% CAGR) industry worth $30 billion per year in the U.S. and that’s expected to hit $100 billion annually around the world by 2022.

7. A major reason Colgate enjoys such a wide moat is its economies of scale. That includes spending about 12% of sales on R&D and advertising, to maintain or increase its brands’ pricing power and develop new products. Colgate has 12 R&D facilities around the world that in 2017 alone were granted 1,780 patents, about four times that of its nearest rival…

8. The company’s investments in cost savings tend to generate massive internal rates of returns. In 2012, it launched a Global Growth and Efficiency Program that is going to wrap up in 2019 (before a new one begins) which alone is expected to generate total annual savings of $500 million to $575 million.

9. Colgate’s management team is a legend in its industry, for smart bolt-on M&A including PCA Skin and Elta MD, two fast-growing professional skin care brands the company acquired in 2018. The two companies together have just $100 million in sales but Colgate’s strategy is to buy fast-growing, high margin brands and then accelerate their growth via advertising support and improved distribution (plus superior supply chain and cost savings to boost margins). That includes the best profitability, which has remained stable over the past decade. That’s a great sign of a wide and stable moat, which allows Colgate to generate stable and high free cash flow margins to support its safe and steadily rising dividend.

 

(Source: Simply Safe Dividends)

10. Management expects to generate long-term sales growth of 4%, with an annual margin expansion of about 0.33%.

Assuming the best managers in the industry can deliver on that plan, Colgate should be able to deliver 4% to 6% long-term earnings, cash flow, and dividend growth. This makes it a great choice for conservative income growth investors, especially if you are patient and wait to buy or add to your position at opportunistic times.

2. Clorox (CLX)

Clorox…[was founded] 106 years old and is focused on cleaning products which it sells in over 100 countries.

10 Reasons I Like Clorox:

1. It has very strong dividend safety courtesy of a good payout ratio… and recession-resistant cash flow. This stable and steadily rising cash flow, plus conservative use of debt, is what has allowed Clorox to deliver 41 consecutive years of dividend growth…

2. …Clorox still enjoys an A- credit rating courtesy of a modest and safe leverage ratio, and strong interest coverage.

3.  Clorox is quite diversified but is still mainly a U.S. company, with 83% of sales from its home market…[where] across all its business lines, it has about 20% market share but 90% of U.S. households use Clorox branded cleaners.

 

(Source: investor factsheet)

4. Rather than competing in lower margin products with the likes of giants like Procter & Gamble (PG), whose sales are about 10 times larger, Clorox’s core business is focused on dominating smaller segments that the big boys aren’t targeting as aggressive. For example, it has a 60% market share in US bleach, 74% in US charcoal and 30% in US trash bags, including 50% in premium trash bags.

(Source: CLX investor presentation)

Essentially, Clorox is focused on dominating its niches, which is why 80% of company revenue is from products in which it has #1 or #2 market share.

5. Supporting that wide moat is the company’s decades-long relationships with both consumers and distributors. The company spends 11% to 12.5% of sales annually (about $700 million) marketing and developing new products, which get premium shelf space in stores around the country.

6. …Management has a stated policy of trying to drive about 3% annual sales growth from new products which it achieved in 2018…

 

(Source: CLX investor presentation)

7. …Management, led by CEO Benno Dorer (14 years at Clorox and before that 14 at Procter), is wisely targeting a new growth market, personal care products/lifestyle brands. Today this segment makes up 17% of sales and Clorox, much like Colgate, has grown this business via numerous small and low-risk bolt-on acquisitions including buying Burt’s Bees in 2007, acquiring Renew Life in 2016 and buying Nutranext in 2018.

8. …Even with a successful strategy built around dominating its niches and breaking into faster growing, high margin business lines, Clorox’s can’t grow its bottom line without strong cost controls. Fortunately, management has proven masterful at consistently driving down costs.

 

 

(Source: CLX investor presentation)

Since 2003 Clorox’s goal was to boost EBIT margins by at least 1.5% per year through cost-cutting. It’s managed to achieve that goal and typically exceeds it by a wide margin.

9. Clorox has the second best ROIC in the industry, second only to Colgate. Remember that ROIC is a proxy for good management, and Clorox’s is truly world-class when it comes to allocating shareholder capital wisely. Over the past decade, the company’s ROIC has ranged from 29% to 42%. That industry-leading ROIC is courtesy of management’s smart capital allocation priorities which include:

• growing the business,
• maintaining a safe and growing dividend, securing the balance sheet (long-term leverage target 2.0 to 2.5) and
• buying back stock opportunistically with remaining free cash flow.

10. Over the long-term management expects to grow sales by about 4% while gradually boosting EBIT margins. When combined with opportunistic buybacks that should be good enough for 4% to 6% long-term EPS and dividend growth, similar to Colgate.

When wrapped in a low-risk/blue-chip (and recession resistant) dividend aristocrat package, I consider Clorox to be a great choice for conservative income investors.

3. Hershey (HSY)

Hershey was founded in 1894 and sells candy, confectionary goods, and food under more than 80 brands, in over 90 countries.

 

(Source: HSY investor presentation)

10 reasons why I’ve added Hershey to my own retirement portfolio watch list:

1. Hershey’s payout track record is stellar when it comes to maintaining and growing the dividend, which hasn’t been cut since 1930. That’s courtesy of a conservative capital return policy built around safe income (target payout ratio is 50% of earnings). That’s what allows Hersey to deliver one of the safest dividends on Wall Street, again courtesy of recession-resistant cash flow.

 

(Source: Simply Safe Dividends)

2. Just like Colgate and Clorox, the balance sheet is in excellent shape, with low leverage, high-interest coverage, and a strong A credit rating. This allows for low-cost borrowing, which in the hands of a skilled management team, leads to strong growth in earnings, cash flow, and dividends.

3. Hershey is mostly a U.S. company, with 84% of sales and 96% of operating profits coming from its home market. That’s because it’s spent the past 125 years building up a wide moat based on dominating the candy/confectionary market in America courtesy of strong brands, including six mega-brands that generate about $6 billion in annual sales (75% of total company revenue). In chocolate Hershey dominates with 45% market share, and 30% in overall confectionary…

(Source: HSY investor presentation)

4. The key to that brand strength is about $500 million in advertising per year, accounting for about 6% of sales. Total marketing/R&D spending is about 8% per year and totals $3 billion over the past five years.

5. Hershey’s plan to shift with the times is to use its great track record on M&A (over 50 acquisitions since 1963) to break into healthier snack offerings. That includes via purchasing KRAVE Pure Foods (a leader all-natural jerky) in 2015, Ripple Brand (BarkTHINS premium chocolate snacks) in 2016, and Amplify Snacks (Skinny Pop) and Pirate Brands ( trans-fat-free and gluten-free snacks) in 2018.

 

(Source: HSY investor presentation)

Relative to Colgate and Clorox, Hershey’s M&A tends to be larger (and thus riskier) in terms of size. Amplify and Pirate boosted top-line growth by about 5%, though declines in candy resulted in just 3.9% constant currency sales growth last year.

6. In the short-term, CEO Michele Buck (10 years with Hershey, mostly as COO and CEO since 2017) plans on cost-cutting its way to growth by leveraging its economies of scale. The company is working on $150 million to $175 million in cost cuts (amounting to about 2% of sales) by improving U.S. factory efficiency and divesting itself of less profitable international operations.

Hershey’s track record on delivering on cost-cutting is excellent, with the company steadily increasing its adjusted operating margin consistently over the past decade.

 

(Source: HSY investor presentation) – 2018 adjusted operating margin 20.6%

7. That’s turned Hershey into the one of the most profitable packaged food company in America, with gross margins higher than even McCormick (MKC) the king of the incredibly lucrative spice market.

 

(Source: HSY investor presentation)

What’ even more impressive is that Hershey’s margins are currently being hurt by international operations where it’s profitability hasn’t had time to grow nearly as strong as in the US.

 

(Source: HSY investor presentation)

While most of Hershey’s overseas businesses are doing well, China has been a tough market to crack, and a lack of the same economies of scale in terms of distribution and logistics means profits have been insignificant. Most foreign divestitures will be in China, where Hershey bought 80% of Shanghai Golden Monkey for $584 million in 2013.

8. Hershey’s plan to continue delivering strong bottom line growth (among the best in the industry in fact), comes down to doubling down on digital advertising of U.S. brands.

(Source: HSY investor presentation)

In 2018 HSY’s digital market share rose 2.3% courtesy of data-driven online marketing resulting in average selling baskets being 1.2 to 3.5 times larger than traditional retail.

9. Hershey’s strategic focus on U.S. brands and digital marketing translate into is some of the most impressive bottom line growth in the industry.

 

(Source: HSY investor presentation)

10. That includes 2019 guidance of 2% sales growth (even including -2.3% growth from Chinese divestitures) and 6% EPS growth which is at the lower end of management’s long-term goal of 6% to 8% EPS and dividend growth (courtesy of a fixed payout ratio). How realistic is that growth plan? Well, according to Factset Research, analysts expect five-years EPS growth of 7.5%, the upper end of management’s guidance.

(Source: HSY investor presentation)

If management is able to deliver on that, then Hershey is going to prove not just a safe source of above market average yield, but some of the best dividend growth in the defensive consumer staples’ industry.

Valuations

Since 1954 a good total return model has been the Gordon Dividend Growth model which says that over time total returns equal yield + long-term earnings/cash flow/dividend growth. That model assumes constant valuations, so you need to adjust for whether or not a stock starts out over/undervalued.

Company	Yield	5-Year Expected Earnings Growth	Total Return Expected (No Valuation Change)	Valuation-Adjusted Total Return Potential (5 to 10 Years CAGR)
Colgate	2.5%	4% to 6%	6.5% to 8.5%	8.6% to 10.6%
Clorox	2.5%	4% to 6%	6.5% to 8.5%	5.7% to 7.7%
Hershey	2.5%	6% to 8%	8.5% to 10.5%	8.7% to 10.7%
S&P 500	1.8%	33%	6.5%	1% to 7%

(Source: Simply Safe Dividends, F.A.S.T Graphs, Morningstar, management guidance, Yardeni Research, Yahoo Finance, Multipl.com, Gordon Dividend Growth Model, Dividend Yield Theory, Moneychimp, analyst estimates)

Company	Yield	5-Year Average Yield	Estimated Discount To Fair Value	Upside To Fair Value	5-Year Valuation Boost (OTCPK: CAGR)
Colgate	2.5%	2.2%	10%	11%	2.1%
Clorox	2.5%	2.6%	-4%	-4%	-0.8%
Hershey	2.5%	2.5%	1%	1%	0.2%

(Sources: Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model, F.A.S.T Graphs, management guidance, Moneychimp)

Buying any of these stocks today isn’t likely to result in very good valuation boosts making double-digit total returns over the next five years tricky…but, since I’m a patient and disciplined blue-chip investor, I’m more than willing to wait to buy these three consumer staples companies until the valuations make double-digit returns highly probable…

That’s not to say you can’t buy HSY or CL today and still get decent returns. If preservation of capital and safe dividends are your main goal, then both are OK to add to your portfolio right now… I’m a deep value investor at heart, though, and happiest to buy top quality companies when the market has priced them at a steeper discount to fair value.

No matter when you might want to buy Clorox, Colgate or Hershey, however, you should only do so if you’re comfortable with their risk profile (see details in the original article], and only as part of a well-diversified and constructed portfolio.

Bottom Line: Colgate, Clorox, and Hershey Are Great Dividend Blue Chip Buys At The Right Price

…Colgate and Hershey…are possibly good buys today. Clorox appears about fairly valued to modestly overvalued, depending on how conservative you want to be with your growth outlook…

I consider Colgate, Clorox, and Hershey to be three of the best consumer staples companies you can own. That’s courtesy of their wide moats, strong brands, solid balance sheets, and good to great management teams/corporate cultures.

I have confidence that all three will overcome their current challenges but, at the same time, I’m eager but not desperate to add these three companies to my retirement portfolio, which is why I’ve merely added to my watchlist while I patiently wait for a better price.