Friday, May 10, 2013

Procter & Gamble (PG) - A dividend stock to hold forever

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1891 and increased payments to common shareholders every for 57 consecutive years. There are only fifteen companies in the world which have managed to boost distributions over half a century. One of the largest shareholders is no other but Warren Buffett’s Berkshire Hathaway (BRK.B).

The company’s last dividend increase was in April 2013 when the Board of Directors approved a 7% increase to 60.15 cents/share. Procter & Gamble’s largest competitors include Kimberly-Clark (KMB), Colgate-Palmolive (CL) and Clorox (CLX).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.40% to its shareholders.

The company has managed to deliver a 7.90% annual increase in EPS since 2003. Analysts expect Procter & Gamble to earn $4.05 per share in 2013 and $4.36 per share in 2014. In comparison Procter & Gamble earned $3.12 /share in 2012. The 2012 results included impairment of goodwill for 51 cents/share as well as a 20 cents/share incremental restructuring charge.

Since the company acquired Gillette in 2006, the number of shares has decreased from 3.286 billion to 2.941 billion in 2012.

Procter & Gamble is a globally diversified consumer products company. Procter & Gamble’s long-term strategic goals include growing organic sales at 1% to 2% faster than market growth in the markets in which the company competes. Another important goal includes EPS growth in the high single digits to low double digits.

The company offers a broad scope of products for every consumer at different price points, and has a sizeable distribution network, which enables it to have a global geographic reach. The company invests in innovation, has a broad portfolio of products and strengths in emerging markets. Procter & Gamble also owns strong brand names, which allow it to maintain pricing power, in order to be able to pass price increases to consumers. The sheer scale of its massive operations and broad geographic reach ensure that the company is able to generate consistent revenue streams.

The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. The company has the benefit of its large scale and sells a diverse number of products that have a broad geographic reach. The company has a consistent revenue stream and is targeting earnings per share growth in the high single to low double digits.

In 2012, P&G announced plans to achieve $10 billion in cost savings over the next five years. The savings would be realized through elimination of overhead positions, reducing packaging costs, increasing focus on digital advertising at the expense of print as well as squeezing out inefficiencies.

The company’s return on equity decreased in half when it acquired Gillette in 2006. This indicator has stabilized around 19% for four years after that, before decreasing to 14% in 2012. I fully expect this to rebound to 19% in 2013, as 2012 performance was low because of one-time accounting charges. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 10.80% per year since 2002, which is higher than the growth in EPS.

An 11% growth in distributions translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1976 we see that Procter & Gamble has actually managed to double its dividend every seven years on average.

The dividend payout ratio has mostly remained between 40% and 50%. Currently, it is at 68%, mostly due to lower earnings from one-time accounting charges. Given forward earnings of $4.05/share in 2013, the payout is a sustainable 55.50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Procter & Gamble is attractively valued at 17.40 times earnings, has a sustainable dividend payout and yields 3.10%. I consider Procter & Gamble to have the qualities of a perfect dividend stock, which should be a core holding for any serious dividend investor. I would consider adding to my position in the stock on dips.

Full Disclosures: Long KMB, PG, CL, CLX

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