Procter and Gamble Stock Analysis
Procter and Gamble stock has long been a staple of many a dividend investor. And I too have been a long-time holder of Procter and Gamble stock.
In addition, we use a number of Procter and Gamble (also known as P&G) products around our household. So let’s air out this dividend King’s dirty laundry. Then run Procter and Gamble stock through a dividend deep dive.
Procter & Gamble Company Background
P&G is a branded consumer goods company. They classify their products into a number of different categories.
I’m going to name the categories. And, for my personal interest identify what products we purchase on a regular basis.
We use Tide to do our laundry.
Cascade goes into our dishwasher. And when we hand wash the dirty dishes, we use Dawn.
Those Mr. Clean Magic erasures come in pretty handy. I scrubbed every wall with them when we cleaned up our house to sell it a couple of years ago.
Having no kids, we haven’t participated in this category. Mrs. DD threatened to put diapers on me if I didn’t grow up. And then I threw a tantrum and got my way!
This category is too personal. No comment.
This includes Bounty paper towels, Charmin toilet paper, and Puffs Kleenex. We buy other brands in this category. These are commodities to us and we purchase cheaper alternatives.
Personal Health Care
I take Vicks NyQuil when I get a cold. And if it gets really bad I will smear Vicks VapoRub all over my body before I go to bed. This is when Mrs. DD sleeps in the guest bedroom!
We use alternative products in this category for toothpaste, mouth wash and the like.
I use Gillette razors. They are pretty expensive. Maybe I should stop shaving to save money?
We have no usage of P&G products from this category. At the rate I’m going I won’t need hair care products in a few years anyway. I’m just kidding. I have plenty of hair on my head.
Skin And Personal care
Not much used from this category either. I know I have used Ivory soap at some point. But I’m not brand loyal to bar soap.
Mrs. DD uses a lot of skin moisturizers, but she uses other brands for the most part.
So there you have it. I hope you enjoyed snooping around our cabinets and closets for P&G products.
Procter & Gamble Business Risks
Branded consumer products businesses have been facing major headwinds. Organic growth rates have been weak as consumers shift to lower-cost private label products.
And there is stiff competition from local brands in foreign markets. It takes time and money to understand the cultural preferences of local consumers.
On the expense side of the ledger, commodity price inflation and transportation cost increases must be dealt with. Finally, a stronger US dollar presents a threat because so much of P&G’s business is done in foreign currency.
Procter & Gamble Growth Strategy
To combat business risk, P&G has a 5 point business strategy.
Focused product portfolio – With an emphasis on daily use products
Superior products – Product quality, packaging excellence, and high value
Productivity – Cost reductions and efficient cash usage delivering $10 billion in savings to fund profits and investment
Constructive disruption – Through brand building, digitization and supply chain efficiencies
Organization – Operating through 6 industry based strategic business units
Source: P&G strategy
Procter & Gamble Stock & Dividend Analysis
Now that we know what P&G is all about, let’s get back to the Procter and Gamble stock analysis. And of course, we will take a close look at the Procter and Gamble stock dividend to see how it’s impacting our passive income from dividends.
Procter & Gamble Dividend Yield
Procter and Gamble’s stock pays a $2.98 per share dividend. At the recent PG stock price, this gives us a 2.4% dividend yield.
Before we go any further, Procter & Gamble stock trades on the New York Stock Exchange. The stock symbol is PG.
Procter & Gamble Dividend Growth
|1 Year||3 Years||5 Years||7 Years|
P&G dividend growth has been pretty low in recent years. And the most recent increase was similar, checking in at 4%.
I will be watching closely for the next dividend increase announcement. And, I certainly would like to see dividend growth accelerate.
Consecutive Years Of Procter & Gamble Dividend Increases
One of the attractive qualities of the Procter and Gamble stock dividend is its long history of growth.
P&G is a dividend king. Management has increased the annual dividend payments for 63 consecutive years. I love that type of consistency as a dividend growth stock investor.
To learn more, I reviewed the press release announcing the dividend increase and the 2019 shareholder meeting materials. In both cases, management emphasizes its long term track record of cash returns to shareholders.
However, they stop short of declaring a specific dividend policy. This is not unusual. But I do prefer when a company clearly states its future dividend payment objectives.
As I have noted, dividend growth has slowed. This is due to declining revenues and stagnant earnings. So, let’s dig into these business fundamentals to understand them better.
Revenue was on the decline for a number of years. This was due to a major restructuring the company started in 2014. The company decided to sell off more than 100 brands to accelerate growth.
Selling off brands to grow may not make sense on the surface. However, to coin a couple of old expressions, P&G pursued “addition by subtraction”. They assumed “less is more”.
I used their shift in strategy as a case study for a business planning course I was teaching at the time. I still have the Wall Street Journal article I used in class that outlined their big strategic announcement.
They didn’t identify any of their brands to be sold at the time. However, they said those brands represented about $8 billion per year in revenue. And that approximates the revenue drop the company experienced starting in 2015.
More than 40 beauty brands were sold to Coty. The Duracell battery brand was sold to Berkshire Hathaway just to name a couple of the divestitures.
With their strategic repositioning completed, it appears revenues bottomed out at $65 billion. And, have grown slowly, but consistently starting in 2017.
P&G Stock Dividend And Earnings Per Share
Accounting earnings are very choppy. And, hard to understand in my opinion.
Gains and losses on the sales of their brands as well as one time impacts from the 2017 tax reform act make accounting earnings per share tough for me to judge.
In fact, the spike in earnings in 2017 was from a one-time gain on the sale of the beauty brands to Coty. And the earnings drop in 2019 was due to the one time write off of goodwill and intangible assets from the Gillette shave care business. Guys are shaving less and low-price competition has increased in this area.
But, there are 2 things that I can take away from the chart. First of all, dividends per share grow steadily. Furthermore, earnings per share usually cover those dividends by a good margin.
It should be noted too, that P&G has taken on an aggressive cost reduction program. This program has provided solid support for earnings growth and cash flow.
Procter & Gamble Free Cash Flow
Since earnings are so volatile let’s look at how dividend payments stack up against Procter and Gamble’s free cash flow.
Cash is cash. A company can-not manipulate its cash flows. And cash is not impacted by accounting rules.
If I could only have one financial statement from a company I would choose its statement of cash flows. From my perspective, it tells me the most about a company’s past performance.
The chart above shows us that P&G has been using about two-thirds of its free cash flow over the past three years to pay dividends. For such a stable company, selling consumer staple products that have consistent demand, this is a very comfortable level to me.
The rest of P&G’s free cash flow is allocated to retiring shares of its stock in the stock market. And, to a much lesser extent, reducing debt.
Procter & Gamble Credit Rating
It’s a good idea to check in on a company’s credit rating. Similar to how your own credit score works, the rating provides an indication of how safe it is to lend the company money.
Moody’s and S&P rate P&G as “investment grade – very low credit risk”. They provide Aa3 and AA- ratings, respectively.
This is a very strong credit rating. It ranks quite high in the credit evaluation chart shown below.
Procter & Gamble Financial Position
The credit ratings give me an indication that the company has a very strong balance sheet. And, P&G does, in my opinion.
I judge a company’s financial position based on it’s debt to equity ratio. I do not like my dividend stocks loaded up with an unsustainable amount of debt.
P&G has a low debt to equity ratio checking in at just .6 times. This is lower than the average S&P 500 company and looks very good to me.
Procter & Gamble Dividend Safety
I make a judgment regarding dividend safety for every dividend stock I own. It helps me to avoid dividend reductions from stocks in my dividend stock investment portfolio.
My evaluation tells me that Procter & Gamble’s stock dividend is very safe from a reduction in the foreseeable future.
I base this conclusion on many of the areas we have reviewed thus far. Specifically:
- Business fundamentals
- Dividend payout ratios
- Historical dividend track record
- Credit ratings
- Financial position
Procter & Gamble Dividend Growth Projection
In order to plan for my future income, I also forecast annual dividend growth. It’s much easier when a company clearly communicates a stated dividend policy. Unfortunately, this is not the case for P&G.
I still do my best to make a forecast based on:
- Historical dividend growth
- Dividend payout ratios
- Business fundamentals
- Company growth strategy
So, I am forecasting 5-7% annual P&G dividend growth.
This growth rate is higher than in the last several years. But not as fast as when P&G was a smaller faster-growing company.
Procter & Gamble Stock Valuation
Procter & Gamble stock looks overvalued to me. The stock was much cheaper in late 2018. It has since rallied about 75% from those stock price lows.
I reviewed the P&G stock valuation in several different ways. Each method indicates a more reasonable buy target in the low $100’s price per share.
P&G Dividend Discount Model Valuation
The single-stage dividend discount model uses several factors we have discussed thus far.
- Current annual dividend payment – $2.98
- Projected annual dividend growth – 6%
- My desired annual return on investment – 9%
Using these variables the dividend discount model calculates the fair value of Procter and Gamble stock to be $105 per share.
Morningstar Fair Value Estimate
The investment analysis firm Morningstar estimates the fair value of P&G stock to be $109 per share.
Procter And Gamble Stock Price To Earnings Ratio
Procter and Gamble’s stock trades at 27 times projected 2020 earnings. This is a pretty expensive valuation. It is significantly higher the S&P 500 that trades at nearly 20 times 2020 earnings.
A price to earnings ratio in the low-to-mid 20s would not be unreasonable for a quality stock such as P&G. But 27, is a little high for my taste.
Procter & Gamble Stock and Dividend Analysis – Conclusions
I have owned P&G stock for many years. And, it has grown into one of my top 10 largest positions in my dividend stock portfolio.
It’s nice to finally be rewarded with substantial increases in P&G’s stock price. Patience was certainly required as the company restructured its brand portfolio. And, dividend growth slowed.
For now, I plan to hold my P&G stock.
The relatively low dividend yield and low dividend growth are not very appealing to me. Couple that with a high stock valuation and I think there are better dividend stocks for new money right now.
Moving forward, I will be looking for indications of faster dividend growth. And, better buying opportunities for Procter and Gamble stock.
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