Just think about what kind of success you’d have to have as a company in order to not just pay a dividend to your shareholders, but increase that dividend annually for decades upon decades on end.
You’d have to do a lot of things right, that’s for sure.
After all, a dividend is a cash payment that obviously requires cash in order to pay it.
Thus, increasing your dividend for decades means you have to somehow generate increasing cash flow for decades.
[ad#Google Adsense 336×280-IA]So what if I told you there’s a company out there that has increased its dividend to shareholders for the past 58 consecutive years and isn’t slowing down?
That kind of track record speaks for itself, but let’s just delve into the details a bit.
This company just oozes quality everywhere you look.
Just some quick facts:
They’ve been in business for 177 years.
Their products are available in over 180 countries.
They own 23 billion-dollar brands.
Yep, you read that correctly. 23 of their brands generate more than $1 billion in annual sales.
What company is this?
Procter & Gamble Co. (PG).
A well-known company with roots dating back to the Industrial Revolution, they remain just as relevant today as they’ve ever been. After all, this is a $225 billion company we’re talking about.
And they maintain their relevancy, importance, and profitability via a slew of high-quality and well-known brands used by households across the globe.
These brands stretch the gamut of household needs.
Think Crest toothpaste, Tide laundry detergent, Gillette shaving products, Head & Shoulders shampoo, CoverGirl cosmetics, and Charmin bath tissue.
Think about it. No matter what happens to the global economy, people aren’t going to stop brushing their teeth, doing their laundry, or taking care of their themselves in regards to grooming and cleaning. That kind of assurance and reliability makes PG a fantastic stock to own for the long term.
And what’s amazing is that the above brands represent just a fraction of PG’s portfolio.
So let’s take a look at what this stock offers for investors today by looking at some of their fundamental financial information.
First up is growth.
PG has increased its revenue from $56.741 billion in fiscal year 2005 to $83.062 billion in FY 2014. That’s a compound annual growth rate of 4.33% over the last 10 years.
Meanwhile, their earnings per share is up from $2.66 to $4.01 over this stretch, which is a CAGR of 4.67%. Not particularly impressive, even for a behemoth like PG, which has prompted the company to start restructuring operations by focusing more on core brands.
Keep in mind as well that this isn’t a growth stock. It’s a defensive holding that should produce fairly stable and reliable results over long stretches of time.
S&P Capital IQ is expecting PG to produce 8% compound annual EPS growth over the next three years, which is in line with management’s goals and expectations.
Now, the dividend is where a lot of my focus is. Rightfully so, as I explained earlier. And I don’t just write that; the vast majority of my personal wealth is invested in high-quality dividend growth stocks like PG.
In regards to the dividend, PG is one of the most masterful stocks out there.
First, they’re a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list – a document that tracks every single US-listed stock (almost 700 of them now) that has increased its respective dividend for at least the last five consecutive years.
To become a “Champion”, a stock must increase its dividend for at least 25 consecutive years. Impressive as that is, PG has obliterated that with the aforementioned track record of almost six consecutive decades of dividend raises.
The dividend raises themselves are also incredibly solid. Over the last decade, PG has increased its dividend by an annual rate of 10%. Though I suspect we’ll see dividend growth in line with management’s expectations regarding EPS, that’s still enough to produce incredible gains in dividend income and great long-term total returns.
The payout ratio is high right now at 75.7%.
That’s moderately concerning, which is also why dividend growth moving forward will likely be no higher than EPS growth.
But the stock does offer a really appealing yield of 3.07% right now. That’s rather significant in a low-rate environment like we have right now.
PG’s balance sheet is in great shape across the board. The long-term debt/equity ratio is 0.29 and the interest coverage ratio is approximately 22. No issues here.
The firm’s profitability metrics have steadily declined over the last five years, which is part of the reasoning behind the renewed focus on core brands. PG’s net margin has averaged 13.30% over the last five years. Return on equity averaged 16.80% over this time frame. Solid numbers, but there is room for improvement.
Look, I love to invest in companies that produce products and/or services that are ubiquitous… and PG’s product portfolio screams ubiquity. In fact, I can look around my own home right this second and find products that PG produces. I shave with a Gillette Fusion razor, brush my teeth with Crest toothpaste, and use Old Spice deodorant.
And the tangible nature of using the products that you invest in is really wonderful.
Meanwhile, growth should continue to improve. In 2013, the company brought back their legendary CEO, A.G. Lafley after he originally retired from the company in 2010. Since then, they’ve divested underperforming brands and have decided to become a more focused company with 70 to 80 core brands.
Because of the nature of this business, I view this is a pretty low-risk investment. There are of course risks like currency and competition to consider, but that’s true for any global business.
Looking at the valuation, the stock’s P/E ratio is 24.64 right now. That’s quite the premium to the five-year average of 19.6. So we have perhaps a premium valuation for a stock that’s had some difficulties over the last five years or so.
I valued the stock using a dividend discount model analysis with a 10% discount rate and a 6% long-term growth rate. That growth rate is in line with recent dividend raises and gives them some benefit of the doubt due to the restructuring and higher anticipated EPS growth moving forward. The DDM analysis gives me a fair value of $68.22, which is 18% lower than where the stock trades at right now.
Bottom line: Procter & Gamble Co. (PG) is one of the world’s premier companies with 23 $1 billion brands. The odds of consumers across the world continuing to use their ubiquitous products are quite high. However, the stock’s valuation seems rich here. The fair value I came up with would put the P/E ratio closer to 20, which is in line with their five-year average. This is a fantastic stock, but I wouldn’t recommend buying it at this current price. I’d wait for a price more in line with its likely intrinsic value around $68 per share or perhaps for a sign that the renewed focus is truly putting this company back on track for its anticipated growth moving forward.
— Jason Fieber, Dividend Mantra
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