Procter & Gamble (PG) Stock Dividend Analysis

The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has raised distributions for 53 consecutive years.

This dividend stock has delivered an average annual total return of 3.30% over the past decade.

Earnings per share have grown at an average pace of 12.50% per annum. For FY 2010, analysts expect the company to earn $4.15/share, which is higher than 2009’s EPS of $3.58. For FY 2011 analysts expect Procter & Gamble to earn $4.10/share. The company has focused on cost cutting, improving efficiencies and streamlining its product portfolio over the past few years. It sold its Folgers Unit and exited its pharmaceuticals operations. As consumer spending picks up, the company’s recognizable brand products could get a nice boost in sales, especially if it increases advertising. Emerging and developing markets, product innovation, focusing on high margin products as well as strategic acquisitions could deliver strong earnings growth over the next decade. The demand for the company’s line of consumer products is generally stable and not much affected by overall economic conditions. The company continues to benefit from its acquisition of Gillette, through cost synergies and sales growth opportunities from its diverse sales channels.

The annual dividend per share has increased by an average of 11% annually, which is below the growth in earnings. An 11% growth in dividends translates into the payment doubling every almost every six and a half years. Procter & Gamble has managed to double its distributions every seven years on average since 1973.

The return on equity has decreased since the acquisition of Gillette in 2006.

The dividend payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that Procter & Gamble is attractively valued with its low price/earnings multiple of 15, a not too high DPR. However the current dividend yield is below the 3% minimum threshold that I have set. Two of PG’s competitors, Colgate-Palmolive (CL) and Kimberly-Clark (KMB) trade at P/E multiples of 19 and 13 times earnings respectively. Colgate-Palmolive currently spots a 2.60% dividend yield, while Kimberly-Clark has a 4.00% yield. I would consider adding to my Procter & Gamble holdings on dips below $59.

Full Disclosure: Long PG

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Capitalize on China’s Growth with these dividend stocks

China seems to be the engine of global growth these days. The country has managed to turn itself into the manufacturing facility of the world, producing almost everything that consumers in the western world need. It is being said that investing in China in 2010 is similar to investing in USA in 1910 or investing in the UK in 1810. Whether this turns out to be true or not, the Chinese economy has managed to expand rapidly over the past decade, fueled by demand for cheap goods which its skilled and low-cost labor force produces for worldwide markets. While there are plenty of ways to invest in the Chinese economic growth, including Chinese listed ADRs traded on the NYSE or Nasdaq, few have a long history of dividend increases, which would make them an interesting income play.

Most global companies do have a presence in China however. Some of these companies have had operations in the country for years, and have also developed a strategy for expanding their business there, which would provide strong earnings and dividend growths for the future. Some of these companies include well known dividend stocks such as McDonald’s (MCD), Coca Cola (KO), Wal-Mart (WMT) and Philip Morris International (PM).

While Philip Morris International (PM) does face declining demand in Western Europe, which accounted for a little less than 50% of its operating income, the company could benefit from growth in emerging markets such as China or India as well as from strategic acquisitions. The company’s low penetration in the Chinese market, which represents one third of the worldwide demand for tobacco products, could present an attractive opportunity. PMI has reached an agreement with the China National Tobacco Company (CNTC) for the licensed production of Marlboro China and the establishment of an international equity joint venture outside of China. In August 2008 production of Marlboro began under license in two factories. The joint venture has successfully launched three Chinese heritage brands in six international markets. Check my analysis of the stock.

Coca Cola (KO) has operated in China since 1979 and was a major sponsor of the recent summer Olympic Games held in Beijing. The company is planning to triple the size of its sales in China over the next decade, and double the size of its bottling plants in the country. China is the third largest country for Coca Cola by revenues, and it’s also a big part of the company’s expected growth in sales over the next decade. Coca Cola is already the largest soft drinks brand in China and its volumes are twice the size of rival PepsiCo (PEP). The potential of the Chinese market is immense – last year there was an average per capita annual consumption of 28 Coke products in China, which was much lower than the 199 Coke products in per capita consumption in Brazil (source). Check my analysis of the stock.

Wal-Mart (WMT) currently has 267 locations in China, operating under Wal-Mart or Trust Mart’s names. The company had 3615 international locations at the end of 2008. There is still room for growth in Chinese operations, fueled by the increase in number of middle-class families in the country. For Wal-Mart, China represents the biggest frontier since it conquered America. China's voracious consumers are pushing retail sales to a 15 percent annual growth rate; that market will hit $860 billion by 2009, according to Bain & Co. (source). Check my analysis of the stock.

McDonald’s (MCD) currently owns over 2000 stores in China. The company has an ambitious plan to expand operations by developing 500 new locations in 3 years. McDonald’s opened 146 restaurants in 2008 and earlier this year expected to open 175 restaurants in 2009. The company has been able to increase sales volumes by expanding its menu of items, offering convenient store hours and opening drive-thrus in the process. Restaurants with drive-thrus are more likely to achieve higher sales and satisfy the demands of the increasingly mobile society in China. Expanding store hours and adding breakfast items to the menu is another opportunity for internal growth at Mcdonald’s Chine operations. Check my analysis of the stock.

McDonald’s (MCD), Wal-Mart (WMT) and Coca-Cola (KO) have each raised dividends for more than 25 years in row. Expanding their operations in China would be the cornerstone that would provide the necessary earnings growth for these dividend aristocrats to be able to raise distributions for the next two decades.

Full Disclosure: Long MCD, PM, WMT, KO

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Seven Dividend Increases in the news

Dividend Investing is more than just selecting stocks that pay dividends. Successful dividend investing is about selecting stocks with strong fundamentals, which not only generate enough cash to reinvest in the growth of the business, but also generate excess cash to pay a rising payment over time. On his 2009 letter to shareholders, Warren Buffett mentioned that ” the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow”. Most dividend growth stocks have exactly the same characteristics.

The stocks which raised distributions last week include:

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company raised its annual dividend by 11% to $1.21/share. Walmart is a dividend aristocrat which has increased its dividend every year since its first declared dividend of $0.05 per share in March 1974. This dividend aristocrat currently yields 2.20%. (analysis)

WGL Holdings, Inc. (WGL) engages in the delivery and sale of natural gas, and provides energy-related products and services in the District of Columbia, Maryland, Virginia, and Delaware. The company increased its quarterly dividend by 2.70% to 37.75 cents/share. This is the 34th consecutive annual dividend increase for this dividend champion. The stock currently yields 4.50%.

General Dynamics Corporation (GD) provides business aviation; combat vehicles, weapons systems, and munitions; shipbuilding design and construction; and information systems, technologies, and services worldwide. The company increased its quarterly dividend by 10.50% to 42 cents/share. This is the 17th consecutive annual dividend increase for this dividend achiever. The stock currently yields 2.30%.

Myers Industries, Inc. (MYE) manufactures and distributes polymer products for industrial, agricultural, automotive, commercial, and consumer markets, primarily in North America, Central America, and South America. The company increased its quarterly dividend by 8% to 6.5 cents/share. This dividend achiever has raised distributions for almost two decades. The stock yields 2.60%.

Canadian Natural Resources Limited (CNQ) engages in the exploration, development, and production of crude oil and natural gas. The company increased its quarterly dividend by 42.90% to 0.15 Canadian dollars/share. This international dividend achiever has boosted distributions since the year 2000. The stock currently yields only 0.80%.

QUALCOMM Incorporated (QCOM) engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. The company boosted its payout by 12% to 19 cents/share and announced a new 3 billion dollar stock buyback
program. The company has raised distributions since 2003. The stock currently yields 2%.

American Greetings Corporation (AM), together with its subsidiaries, engages in the design, manufacture, and sale of greeting cards and other social expression products worldwide. The company boosted distributions by 17% to 14 cents/share. This is the first quarterly increase since 2008, despite the fact that the company’s annual dividend has been on the rise since 2006. The stock yields 3.20%.

I continue to be bullish on Wal-Mart (WMT), despite its low current yield. I believe that it is an excellent business which has a strong competitive advantage. I would be a buyer on any dips to $50.

Full disclosure: Long WMT

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Kimberly-Clark Corporation (KMB) Stock Dividend Analysis

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health and hygiene products worldwide. Every day, 1.3 billion people - nearly a quarter of the world's population - trust K-C brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in more than 80 countries. This dividend aristocrat has boosted distributions for 38 years in a row. The most recent increase was in February 2010, when the company boosted distributions by 10% to 66 cents/share.

This dividend stock has delivered an average annual total return of 2.80% over the past decade.

Earnings per share have grown at an average pace of 3.40% annually. The company has also has repurchased 3% of its outstanding stock annually on average since 2001. For FY 2010, analysts expect the company to earn $4.95/share, which is higher than 2009’s EPS of $4.52. For FY 2011 analysts expect Kimberly-Clark to earn $5.36/share. As with other consumer products companies, the growth is likely to come from developing and emerging markets, rather than developed markets. Developed markets could benefit from cost cutting and efficiency profits, which would decrease the total price of doing business. Commodity prices could be detrimental to total costs at the company, as is the competitive nature of developed markets in which Kimberly-Clark does business.


The annual dividend payment per share has increased by an average of 9.30% annually, which is much higher than the growth in earnings. A 9% growth in dividends translates into the payment doubling every almost eight years. Kimberly-Clark has managed to double its distributions almost every eight years on average since 1986.

The return on equity has fluctuated between a low of 25.70% in 2006 and a high of 39.4% in 2009. Over the past few years it has remained above 30%, which is impressive.

The dividend payout ratio has been on the rise over the past decade, increasing from a low of 32.30% in 2000 to a high of 60% in 2006. Currently it is at 53%. The increase is mostly due to the faster rate of increase in dividends, whereas earnings growth has been somewhat sluggish. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Kimberly-Clark (KMB) is attractively valued at 13.30 times earnings, has an adequately covered dividend payment and yields 4%. Despite the fact that the company has grown slowly over the past decade, it could easily catch up over the next few years, which would make it a worthwhile investment. Add in the consistency of dividend increases and the stock buybacks, and you have a shareholder friendly management which is something hard to find these days.

Full Disclosure: Long KMB


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The ten year dividend growth requirement

After my post when to break your rules, some readers asked me whether it is reasonable to enter into a dividend investment, which has not raised dividends for more than 10 years in row.

The truth is that dividend investing should require intense scrutinizing of companies, in order to find the best stocks for ones portfolio. Otherwise, investors could end up getting whipsawed in and out of stocks, which would increase trading costs and would make them less likely to reach their goals. The reason behind requiring at least a decade of consistent dividend growth is to weed out all companies which are inconsistent in their dividend policies. Few companies which raise distributions for less than a decade end up on the dividend achievers list. In fact of the total universe of 10,000 US publicly traded stocks, less than 300 are included in the achievers list.

The best dividend stocks are typically characterized by having a strong durable competitive advantage, which allows them to grow earnings and increase dividends on an annual basis. A company which raised dividends for only a few years could have achieved that because it simply got lucky by being at the right place at the right economic cycle. Once the economic expansion or trend which boosted the company’s profitability ends, the company’s earnings would stop growing or worse could start declining. This is another major reason to avoid dividend growers with less than a decade of distribution raises.

That being said I do have several stocks on my watch list, which I would be happy to consider for inclusion in my dividend portfolio once the following characteristics are met:

1) Raising dividends for at least 10 consecutive years
2) Trading at no more than 20 times earnings
3) Having an adequately covered dividend payout ratio (or for REITs and MLPs a distribution payout ratio which is consistent with the ratio of the past few years)
4) Yielding at least 3%

The companies which one day could become dividend achievers that I am watching include:

Kellogg Company (K), together with its subsidiaries, engages in the manufacture and marketing of ready-to-eat cereal and convenience foods. Kellogg Company is a former dividend aristocrat, which has fought back to regain its status of a dividend growth stock since 2005. The stock currently yields 3.10%

General Mills (GIS) engages in the manufacture and marketing of branded consumer foods worldwide. General Mills has increased its quarterly dividend in each of the past six consecutive years. The stock currently yields 2.80%.

Microsoft (MSFT) provides software and hardware products and solutions worldwide. Although the company has raised its annual dividend since 2003, over the past quarters the dividend has been flat.

Kraft Foods Inc. (KFT), together with its subsidiaries, manufactures and markets packaged food products and grocery products worldwide. The company has consistently raised dividends since it went public in 2001. In early September 2009 the company announced that it has would leave its current dividend payment of $0.29/share unchanged for the fifth consecutive quarter.

This post was featured in the Carnival of Personal Finance - Women in History Edition

Full Disclosure: None

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