Friday, August 15, 2014

Procter & Gamble (PG) Dividend Stock Analysis 2014

The Procter & Gamble Company, together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. This dividend king has paid dividends since 1944 and has managed to increase them for 58 years in a row.

The company’s latest dividend increase was announced in April 2014 when the Board of Directors approved a 7% increase in the quarterly dividend to 64.36 cents /share. The company’s peer group includes Colgate-Palmolive (CL), Kimberly-Clark (KMB) and Clorox (CLX)

Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.


The company has managed to deliver 7.60% average increase in annual EPS over the past decade. Procter & Gamble is expected to earn $4.20 per share in 2014 and $4.52 per share in 2015. In comparison, the company earned $3.86/share in 2013.


Procter & Gamble also has managed to reduce number of shares outstanding. Since the acquisition of Gillette closed in 2006, the number of shares declined from 3,286 million to 2,894 million.

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. Procter & Gamble is targeting earnings per share growth in the high single to low double digits, which should not be difficult to achieve given the fact that it is offering products that results in repeat sales by consumers. The growth in emerging market economies is a great opportunity for consumer giants like Procter & Gamble.

Procter & Gamble's long-term strategic goals also include growing organic sales at one or two percentage points faster than market growth in the markets in which the company competes. Those are formidable goals, given the fact that Procter & Gamble is so huge.

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 company is the leader is segments such as blades and razors, feminine care, baby products.

The sheer scale of its massive operations and broad geographic reach ensure that the company is able to generate consistent revenue streams. The scale, diversify of products, being a leader in most of your categories and global reach are a definite advantage, which is why I believe the company to have a wide moat. When you have scale, per unit costs for your products are lower than competitors.

Procter & Gamble is going through a $10 billion cost savings program, which would boost earnings. 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 might have stumbled as of the past few years, as evident by the lack of earnings per share growth since 2008. The company lost a little bit of focus, and needs to keep driving innovation and win more consumers to engage in repeated purchases of its products. The risk to it includes consumers looking for more value, and switching to cheaper alternatives. As the economic recovery from the Great Recession accelerates however, I believe that consumer spending should be able to find its way to branded products that companies like Procter & Gamble offer.

The annual dividend payment has increased by 10.80% per year over the past decade, 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 on average. If we check the dividend history, going as far back as 1970, we could see that Procter & Gamble has actually managed to double dividends every five years on average.

In the past decade, the dividend payout ratio increased from 40% in 2004 to a high of 68.60% in 2012, before decreasing to 59.30. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


The return on equity has decreased from 45.70% in 2005 to 17.10% in 2013. The decrease occurred after the acquisition of Gillette in 2005. After that, this indicator has bee generally stable. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


Currently, the stock is attractively valued at 17.70 times earnings and yields 3.20%. Procter & Gamble is already one of my ten largest holdings, which is why further additions there would be less likely for me. I do like the company, and believe it to be one of the few great corporations to hold forever.

19 comments:

  1. not sure why you are making me sign up at Seeking Alpha to read your blog now

    ReplyDelete
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    1. I understand Anonymous. I decided to post a few stock analysis articles on Seeking Alpha, where they pay something like $35 per article plus 1 cent per page view. I wanted to see if I can make some money from analyses I am already doing.

      I must have forgotten however that Seeking Alpha has a requirement to sign up, in order to read the site.

      Thanks for your feedback!

      DGI

      Delete
    2. I have SA's phone app and it is terrible it only lets me read page one and then makes me sign in again. I don't like the site at all. There website on my computer is very nice it only makes me sign in once. DGI I have never had a problem with your site it even remembers me so I don't have to sign in all the time. I can read any article I want when ever I want and the entire article on my phone or my computer. Suzanne

      Delete
  2. Thanks for the analysis DGI. I do not hold this company yet however it might be next. Just need to wait for the next dip.

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    1. DMG,

      I hold a lot of PG, I accumulated between 2008 - 2013. I might not be able to add much going forward there, although I believe this fine company will be there in 20 years, paying more dividends, and earning more.

      DGI

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  3. DGI,
    PG is my 3rd largest holding, for the reasons that you cited. There is always going to be a chance that the economy forces people to buy generic products, but given a preference, most will go for the brand names. PG has some of the strongest, so I plan on keeping the shares and passing them to my daughters after my wife and I leave this world. Your analysis strengthens my resolve as a shareholder.
    Thanks,
    Keith
    PS I already mentioned this, but I too signed up for SA just to read your articles. If you get compensated for your work, then I am glad to have helped in some small way.

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    1. Well, I am only thinking of posting my stock analysis on SA. The reason is that they don't want you to republish whole articles anywhere else, if they pay you. Stock analyses are not as timeless in my opinion than stuff related to strategy and dividend investing, which is why I will keep the rest here. Plus, I might change my opinion, since the traffic to SA is declining after they ended relationship with Yahoo.

      For PG, I am hearing an increasing amount of negative views. It takes a few years of flat earnings, and everyone is proclaiming the end of the world. I doubt this is the end of PG, and I believe the future is much brighter than imagined. the thing is, companies do not just grow in straight line, they have obstacles ot overcome. There are risks of course, and I could be totally wrong too - this is why I am also diversifying. When I bought PG at $45- $60/share, it looked like a nice stock to buy. forever. Things could change, and it could freeze dividends. Or it could snap out of the lull, and start growing earnings - those emerging markets will be growing, plus the US consumer will come back. The stock is pricey today, but if it is available for 15- 16 times earnings, I would add to it.

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    2. I haven't added to my position in PG for a long time; it was one of the first dividend growth stocks that I bought. I have 48 stocks in the portfolio now, ranging from 0.7 to 4.0% (PG is 3.6%). To be honest, I am not thinking about adding any more shares of PG since I have enough at stake. But I won't be selling unless something goes very wrong.

      From my own personal experience, I have worked in the auto industry for 35 of my 57 years. The auto industry gets a ton of press, plus there are a lot of analysts, but most of the big gains that could have been made in the company that I work for would have been when all the analysts were shouting "sell, sell". It seems like they run out of patience just about the time a new model or two are about to be launched that kick butt and drive the stock price way up. All I am getting at is that we really don't know what is truly happening in the major corporations like PG since they are hard to analyze. The numbers that you crunch are a great start for an investor, though, and I appreciate your work.

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    3. You know, the more I do investing, the more I realize that while everyone is trying to look like an expert, noone can correctly forecast the future consistently. This is the real reason why I invest conservatively, and am diversified widely. I always view with a high dose of skepticism when someone tells me to only invest in my "best 10 ideas". To me, this sounds arrogant, because in complex organization like PG or Ford or whatever else, noone knows everything that could go right or wrong. You just need to set the odds up in your favor.

      The one thing I know is that I need to go where the odds are best - long US stocks ( US is the best country to invest in, its not perfect but equities should do well); go long at low valuations and diversify in case you are wrong., and look for companies that have exhibited positive EPS and DPS trends. Success is not guaranteed, but is more than likely. And earning a dividend whether stock price goes up or down is a huge draw to me

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    4. I completely agree and I totally understand now watching your stocks. Before I read Get Rich with Dividends and found your site I had bought two stocks that now after learning how to find sound stocks I found out they have past reverse stock splits. The analysts say they are buys so I hope they have learned from the past and will never reverse split again or I will sell the second I hear of the split if I have not sold sooner. And I will watch them like a hawk. TY DGI

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  4. Mr. DGI I bought Baxter International when you wrote the stock analysis. You said it was going to spin off but I can't find anything on their website or any forms filed for a spin off. However I have seen plenty of other web pages with info. on the spin off.. How soon before the spin off do they do the corporate filing? I also can't find a date of record for stock purchase to receive the spin off. I am new to spin offs so I don't know the procedures. Also do we as shareholders get to vote on the spin off or is it just decided by the corporation? Please Explain spin offs in a posted article so that anyone else who is new to spin offs will benefit. I love your site. Suzanne

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    1. Hi Suzanne,

      You can check it here:

      http://www.baxter.com/press_room/press_releases/2014/07_07_14_cfo.html

      BAX spin-off is expected to occur sometime in 2015. I myself plan to slowly add to position there, subject to availability of funds and valuation of course.

      I should probably write more about spin-offs. It is interesting that when companies separate, they do better for investors than when they are together. It's because you get more focus, which brings better results.

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    2. I also saw that win and arcp are having spin offs but I can't see holding these stocks for the long term nor making a profit from them. I am even questioning my purchase of NYMT last year when it was down. It has gone up a lot and I could sell for a profit but I have over a 15% dividend and analysts are showing that the company is doing well. So I have hung on for now but its past still haunts me.

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  5. Wow dividend investing is awesome I have stocks that pay me every couple of days, spinoffs, splits, and mergers. Who ever says dividend investing is boring has not found your website. This is a lot of fun I can't wait for a down market. Thank You DGI

    ReplyDelete
    Replies
    1. Dividend Investing is boring for most investors. To me it is very exciting to get paid dividends for a stock purchase decision i might have made years ago. For example, August 15 (as well as Feb 15, May 15 and Nov 15) are my biggest days for dividend income. It is awesome when you get cold hard cash, that you can do whatever you want with - reinvest, spend it, or donate it. A bear market cannot take that cash away from you.

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  6. I'm still learning on the valuation of a company. I see you have PG at 17.70 P/E but when I looked it up on yahoo its P/E is 21.80.
    Am I looking at something different?


    Thank you,
    Jack

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    1. Hi Jack,

      I should have said forward earnings, not just earnings. The company is expected to earn $4.46/share for year ending June 2015. Also, at the time I originally wrote the article it was selling for 77 - 78/share.

      Best Regards,

      DGI

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  7. Hold plenty of P&G, not adding any more in the short-term.

    Unless it stops paying dividends, I'll hold.

    Mark

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    Replies
    1. Mark,

      I think you will hold on to PG for a long time then. I will plan to hold on to it, as long as dividend is not cut.

      DGI

      Delete

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