Tuesday, January 30, 2007

Dividend Valuation Update -- P&G and Colgate Shine

I just completed an update of the dividend valuations of the 10 major industry sectors. The leaders and laggards have not changed much in six months, but the earnings news in recent days corroborates some of the data that I see. The two sectors that are most undervalued are the Consumer Staples and the Industrials. I will have more to say about the Industrials in a future edition.

Today both Proctor and Gamble and Colgate reported better than expected earnings, emanating from their emerging markets businesses. P&G was strong in China and Asia, while Cl had an outstanding quarter in Latin America, where the company claims it has a market share over 70%.

In the face of interest rate worries, these two companies would seem to be a natural place for money to flow because neither company is particularly sensitive to rising interest rates. Indeed, according to our models both stocks are undervalued with Colgate being the best bargain at nearly 15% below its Dividend Valuation's intrinsic value. The chart below shows the historical relationship between CL's Dividend Valuation Model and its actual price.

............................ Colgate Dividend Valuation .................

The green-striped bar is our model's projection of CL's value during the next 12 months. Including dividends the expected return is nearly 17%.

Of course, you can't take that kind of a return to the bank. It's just an educated guess, but looking at the economic landscape before us, I would not be surprised to see the staples, and particularly Colgate, continue to shine in 2007.