Question

Select a company that you believe would be a strong choice for investment.

1. Provide background information about the company you have selected.
2. Explain why the stock price of this company does/does not depend on future dividends?
3. Explain why the stock price of this company does/does not depend on dividend growth?
4. Show how to value the stock price of this company using the price-to-earnings ratio (P/E ratio).
5. Demonstrate potential drivers behind future earnings, as paid through dividends, or future growth, as demonstrated through an increase in stock price.

Answer 1

A company-Colgate-Palmolive (India)’s

Back ground information about colgate company:-

Colgate-Palmolive has operations in more than 200 countries and generates about 70 percent of its revenue outside the United States. In 1806, when the company was founded by 23-year-old William Colgate, it concentrated exclusively on selling starch, soap, and candles from its New York City-based factory and shop.

Colgate-Palmolive Company's growth from a small candle and soap manufacturer to one of the most powerful consumer products giants in the world is the result of aggressive acquisition of other companies, persistent attempts to overtake its major U.S. competition, and an early emphasis on building a global presence overseas where little competition existed. The company is organized around four core segments--oral care, personal care, home care, and pet nutrition--that market such well-known brands as Colgate toothpaste.

The stock price of this company depend on future dividends :-

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Colgate-Palmolive (India) paid out 93% of its profits as dividends to shareholders.

The stock price of this company depend on dividend growth:-

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it’s a relief to see Colgate-Palmolive (India) earnings per share are up 7.9% per annum over the last five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Colgate-Palmolive (India) has lifted its dividend by approximately 15% a year on average

The stock price of this company using the price-to-earnings ratio (P/E ratio):-

The traditional P/E calculation divides the current stock price by the company's trailing 12 months earnings. For example, if a stock is selling for $50 a share and the prior 12 months earnings per share was $2, then the P/E ratio would be 25.

Colgate-Palmolive (India)’s next dividend payment will be ₹16.00 per share, on the back of last year when the company paid a total of ₹28.00 to shareholders. Looking at the last 12 months of distributions, Colgate-Palmolive (India) has a trailing yield of approximately 2.2% on its current stock price of ₹1278.55. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.