A Beauty Buy: Cosmetics, Hair and Fragrances

07/14/2017 2:52 am EST


Harry Domash

Publisher, DividendDetective and Winning Investing

We're adding a new pick to our "dividend speculators" model portfolio — Coty (COTY), a global manufacturer and marketer of fragrance, cosmetics, and skin and body care products to the portfolio, explains Harry Domash, income expert and editor of Dividend Detective.

Brands include Calvin Klein, Marc Jacobs, and Chloé. Founded in 1904 and passing through a variety of ownerships over the years, Coty, Inc. went public in a June 2013 IPO.

The new corporation generated lackluster numbers at first, but in July 2015, Coty signed a deal with Procter & Gamble (PG) to acquires the latter's entire portfolio of 43 beauty products including CoverGirl, Clairol, Hugo Boss, Max Factor, and Wella brands.

That acquisition, which closed in October 2016, transformed Coty into the world’s largest fragrance maker, number two in salon hair products, and number three in color cosmetics.

Recognizing the opportunities that the P&G deal presented, Coty hired a new CEO, Camillo Pane, with a strong track record of accelerating growth of existing businesses. Pane took over the day after the P&G acquisition closed.

Pane has launched a three-pronged strategy to remake Coty; 1) strengthen Coty’s iconic brands such as CoverGirl, Calvin Klein, and Hugo Boss, 2) cultivate smaller brands with faster growth potential, and 3) expand geographical reach of all brands.

Pane doesn’t expect these changes to take effect overnight. He sees 2017 as a transition year with a few bumps along the way. Nevertheless, Pane is shareholder friendly. He announced an 82% dividend hike in December, after only two months on the job.

All that said, the beauty products market is in the doldrums, especially in the U.S., and market analysts don’t expect much from Pane. In fact, 11 of the 16 analysts covering Coty are advising selling.

As you may have noticed, regardless of the actual numbers, stocks go up when a firm beats expectations, and drops when it falls short. Given the prevailing pessimism, it won’t take much for Coty to beat expectations. Coty is paying a 2.7% dividend yield.

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