Colgate-Palmolive’s Cashmere Bouquet Talcum Powder Exposure

In recent months and even years, the investing public has paid close attention to the legal exposures facing Bayer and Johnson & Johnson. Bayer acquired Monsanto, which manufactured Roundup, and American juries across the country are determining that Roundup causes injury. Similarly, Johnson & Johnson’s talcum baby powder has been increasingly determined to contain asbestos, and therefore, a causal link to the most asbestos cancer, mesothelioma.

With far less fanfare, Colgate-Palmolive has also found itself involved in talcum powder litigation because it sold Cashmere Bouquet (talcum) powder from 1871 until 1985. It is now involved in similar litigation to Johnson & Johnson, with the company disclosing the following on page 18 of the 2018 Colgate-Palmolive annual report:

“The Company has been named as a defendant in civil actions alleging that certain talcum powder products that were sold prior to 1996 were contaminated with asbestos. Most of these actions involve a number of co-defendants from a variety of different industries, including suppliers of asbestos and manufacturers of products that, unlike the Company’s products, were designed to contain asbestos. As of December 31, 2018, there were 239 individual cases pending against the Company in state and federal courts throughout the United States, as compared to 193 cases as of December 31, 2017. During the year ended December 31, 2018, 132 new cases were filed and 86 cases were resolved by voluntary dismissal, judgment in the Company’s favor or settlement. The value of settlements in the years presented was not material, either individually or in the aggregate, to each such period’s results of operations.

The Company believes that a significant portion of its costs incurred in defending and resolving these claims will be covered by insurance policies issued by several primary, excess and umbrella insurance carriers, subject to deductibles, exclusions, retentions and policy limits.

While the Company and its legal counsel believe that these cases are without merit and intend to challenge them vigorously, there can be no assurances regarding the ultimate resolution of these matters. Since the amount of any potential losses from these cases currently cannot be reasonably estimated, the range of reasonably possible losses in excess of accrued liabilities disclosed above does not include any amount relating to these cases.”

The company does not provide copies of its insurance policies to the investing public (no company does) so it is difficult to do anything other than take Colgate-Palmolive’s word that the costs will be absorbed by insurance. But I do note that Colgate is headquartered in New York, which is a state that does not allow transactions in its state to be insured against punitive damages for public policy reasons. In California, where “direct punitive damages” cannot be insurable, a jury has already awarded a woman $13 million for her use of Colgate’s Cashmere Bouquet over a fifteen-year period of her life.

From an investment point of view, Colgate-Palmolive is a jewel asset that earns $2.4 billion in profits per year. Even if it got whacked with $10 million non-insured settlement/judgment costs from 500 people which is something close to a worst-case scenario from an investor in Colgate’s point of view, we would be looking at total exposure of $5 billion in a worst case scenario. That is the equivalent of about two year’s profits.

This is the Cashmere Bouquet talcum powder that plaintiffs’ attorneys claim had up to 20% asbestos up until the 1970s. That asbestos fiber level might be exaggerated, but I would not recommend buying this product on eBay…

In a realistic case scenario, I would expect that over the next decade, Colgate Palmolive might have to pay out an average cost of $2 million to 300 individuals, which would be exposure of $600 million over a decade, which at a rate of $60 million per year, which would amount to a three percentage point profit drag for a decade.

Answering this question accurately would require disclosure of Colgate’s insurance coverages against punitive damages. For instance, there are 7 lawsuits filed against Colgate in Missouri. Well, in Missouri, it is permitted for a company to insure against all forms of punitive damages. Colgate could get whacked with a $10 million judgment, and so long as Colgate has a policy that covers punitive damages and it is within the policy limits, Colgate would not have to pay anything. But the investor community does not know the details of the circumstances under which Colgate is covered for punitive damages and what the applicable limits. And that is the information that is necessary to assess the effect that Cashmere Bouquet litigation will have on Colgate’s bottom line.

My view is that, for now, I don’t want to pay 24x earnings for a company that I think will probably grow at 7-8% for the next decade (possibly 9-11% growth if this Cashmere Bouquet litigation were not arising). I’ll continue to hold the Colgate-Palmolive shares I previously purchased, and I’ll do so happily because the core earnings power engine is one of the top twenty that exists in the United States, but I do not plan to add until the P/E ratio falls below 17x earnings because I do not believe the current price adequately compensates investors for the Cashmere Bouquet legal risk.

Originally posted 2019-03-31 16:27:55.

Like this general content? Join The Conservative Income Investor on Patreon for discussion of specific stocks!