I invest solely in companies that reward loyal shareholders with regularly rising dividend payments.
I invest in these companies via their common stock, and these stocks are typically coined dividend growth stocks.
That’s a good term for these stocks, because you’re usually receiving a growing dividend for as long as you hold the stock.
Think of companies that feed you, quench your thirst, provide the gas for your car, power your home, produce the grooming products you use every day, sell you your goods, and provide the facilities to store your money.
The products and services these companies provide should be easy to recognize: the bag of chips in your kitchen, the bottles of water in your refrigerator, and the gas in your car.
These are all products and/or services that people use every single day.
And that’s why these stocks are often fantastic long-term investments.
They’re able to do well no matter what’s going on with Washington, interest rates, or tension in the Middle East.
Interest rates can fluctuate up and down all day long, but you’re still going to put gas in your car and drive down to the store to buy products that you need to run your home.
For instance, Procter & Gamble Co. (PG) is a premier dividend growth stock. And for good reason.
This is a company that provides branded consumer packaged goods to more than 180 countries throughout the world. They’ve been in business for 180 years.
Let’s just let that sink in for a second.
They’ve been doing business for 180 years.
Think of all of the things you have to do right to stay in business at all. Now imagine what it takes to not only stay in business for almost two centuries, but routinely and regularly increase your profit and the value of your business over that same time period.
Procter & Gamble has five reportable segments: Fabric Care and Home Care (32% of FY 2017 net sales); Baby, Feminine & Family Care (28%); Beauty (18%); Health Care (12%); Grooming (10%).
While Procter & Gamble is perhaps thought of as a stodgy, old business, it’s actually anything but.
This is evidenced by the company’s recent decision to cull its brands from from approximately 170 down to 65.
Cutting areas of the business that weren’t as profitable and focused allows Procter & Gamble to harness the power of some of the biggest and best brands in the world.
Here are just a few of the monstrous brands Procter & Gamble owns: Head & Shoulders, Olay, Gillette, Old Spice, Crest, Gain, Oral-B, Tide, Luvs, Charmin, Pampers, Mr. Clean, Braun, and Swiffer.
When you brush your teeth, wash your clothes, groom yourself, clean your home, or change your baby’s diapers, the odds are pretty good that you’re using some products manufactured and sold by Procter & Gamble. And you’d be right alongside billions of other people in the same situation.
These are good reasons why Procter & Gamble is a “Dividend Champion”.
The company qualifies as such on David Fish’s Dividend Champions, Contenders, and Challengers list because they’ve raised their dividend for over 25 years.
Well, Mr. Fish might need to come up with something better than a “Champion”, because Procter & Gamble has actually given shareholders annual dividend raises for the last 61 consecutive years.
They’ve hit the “Champion” mark twice over.
Moreover, that time frame includes multiple economic recessions, wars, and political standoffs.
So when you think about buying a stock that is almost guaranteed to pay you more money year in and year out, this is one that should immediately come to mind.
Over the last decade, Procter & Gamble has been able to grow their dividend at a rate of 8.2% per year.
When’s the last time you received a double-digit raise at work?
Now try averaging that for a decade.
Of course, they’re able to continue increasing the dividend because the company is able to increase its profit over the long run.
Procter & Gamble grew its earnings per share from $3.64 to $5.59 from fiscal years 2008 to 2017.
That’s a 4.88% compound annual growth rate in earnings per share over a very challenging decade that included one of the worst recessions we’ve ever seen. Furthermore, the company’s revenue has actually decreased over this same period, due to the aforementioned culling of brands (which reduced total sales).
It’s important to keep in mind, however, that FY 2017 saw an after-tax one-time gain of $1.95 per share (as discontinued operations) on a GAAP EPS basis with the sale of a significant number (over 40) of the company’s beauty brands.
The future growth of the company will depend on their ability to cut costs – they’re targeting $10 billion in savings between FY 2017 and FY 2021 – and harness growth from the remaining stable of branded products.
Looking out over the near term, CFRA (a professional stock analysis firm) predicts that Procter & Gamble will compound its EPS at an annual rate of 8% over the next three years, which would certainly be a nice acceleration over the growth of the past decade.
Profitability for the firm is robust, and it’s been improving of late after the reshaping of the business.
Over the last five years, the company has averaged annual net margin of 14.92% and annual return on equity of 17.84%.
Dividends are funded via profits. And the profits are there for Procter & Gamble because they manufacture products that people all over the world want and need every single day.
For instance, I shave every single day. And I don’t want to look like I shaved with a dull knife.
So I use Gillette razors because they work great.
They’ve created a loyal customer by producing a fantastic product and marketing it very effectively.
They also have a very loyal shareholder, as I’m an enthusiastic investor in PG in my portfolio – a real-life, real-money portfolio I’ve painstakingly built over the last seven years investing in high-quality dividend growth stocks. I put my money where my mouth is.
The company’s dividend is fairly well-funded, which means shareholders don’t need to worry about whether or not that next dividend check Procter & Gamble is going to hit their accounts.
Procter & Gamble currently pays a $0.6896 quarterly dividend per share, and this dividend is funded by earnings that added up to $3.74 per share over the last twelve months (factoring out that big one-time gain noted earlier).
So the payout ratio is 73.8%, which still leaves very modest room for future dividend growth.
But dividend growth is dependent on future growth in profits. If the company can come anywhere near CFRA’s prediction, inflation-beating dividend growth could very well be on the horizon for the stock. For perspective, the most recent dividend increase was 3.0%.
But before you even get into growth of the dividend, investors are collecting a 3.0% yield on shares right now. That’s more than 100 basis points higher than the yield of the broader market (the S&P 500).
And Procter & Gamble is on solid financial footing.
They have a low long-term debt/equity ratio of just 0.33, which means they’re responsible with debt management and shareholders’ equity. Furthermore, the interest coverage ratio is almost 30.
The products the company manufactures and markets are branded, high-quality products that are sold across the globe. Moreover, 61 years of dividend growth speaks for itself, because that dividend growth came on the back of growth in the underlying business. And business growth came about because the products they sell are those that people want and need.
Sell great products. Collect rising profits. Pay out a portion of those rising profits via rising dividend payouts. Repeat.
That’s a cycle I’m glad to be a part of!
Now, even a wonderful business isn’t worth paying any price for. Just like a great product has to be priced appropriately based on value, stocks have an appropriate price one should pay based on the intrinsic value.
At current prices, Procter & Gamble shares appear overvalued right now.
Shares in the company are trading hands for a price-to-earnings ratio of 23.77 (when using GAAP EPS for continuing operations), based on the recent price of $88.96 per share.
That means for every dollar of continuing profit, investors are willing to pay $23.77.
This is a number that’s awfully high no matter how you slice it. The five-year average P/E ratio for the stock is closer to 22, which itself is a bit high. Of course, a high-quality business in an otherwise expensive stock market is going to be priced richly, but the current valuation seems excessive.
In addition, investors are paying more for the company’s sales and cash flow, relative to their recent respective historical averages.
I went a step further and valued shares using a Dividend Discount Model analysis.
This model basically uses the current dividend payout, a predicted future growth rate in the dividend payout, and then discounts that back to a current rate to approximate a fair value on shares. This isn’t exact, but it does give me a general idea of what shares might be worth, depending on how slow or fast the company is able to grow.
I used a 10% discount rate (my desired rate of return) and a 6% long-term dividend growth rate.
I used a 6% long-term DGR because Procter & Gamble is not a fast-growing business any longer. Bottom-line growth over the last decade has been slightly disappointing, which has caused the dividend payout ratio to rise. While future growth may indeed be a bit more exciting, I think dividend growth over the long run is unlikely to exceed this number, especially considering the payout ratio should probably come down just a bit.
The DDM analysis gives me a fair value of $73.14.
This all said, I think one could do worse than buying PG shares here, especially considering the quality of the business and the current yield well over 3%. But the stock also doesn’t appear to be an exceptional opportunity right now when compared to a number of other dividend growth stocks that offer better valuations.
Bottom line: Procter & Gamble Co. (PG) manufactures and markets products that people across the globe want and need every single day. With numerous branded products, sales in over 180 countries, almost 200 years of corporate history, and 60+ consecutive years of dividend growth, PG is a classic dividend growth stock that should be able to reward shareholders with rising dividend payouts for the long term.
— Jason Fieber
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