Dividend Aristocrats

Procter and Gamble Stock, a 63 Year Dividend Aristocrat

Procter and Gamble Stock is a member of the elite S&P 500 Dividend Aristocrats group. Dividend Aristocrats are stocks that have consistently raised their dividends for at least 25 years, are members of the S&P 500 index and have a minimum $3 billion market capitalization.

The company last raised its dividend from $0.7172 in January 2019 to $0.7459 in April 2019, a healthy 4% dividend growth.

In this article, we review Procter & Gamble’s business synopsis, acquisition and growth strategy, 3rd Quarter 2019 earnings results, dividend growth history and valuation and performance to the S&P 500.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Procter & Gamble was founded in 1837 by William Procter and James Gamble. Procter was a British candle maker who sold soaps and candles to the Union Army during the American Civil War. The company was born after Procter designed the first inexpensive soap that floated on water.

Today, the company is a giant consumer goods manufacturer selling consumer health and personal care products including those of grooming, fabric and home care, beauty and feminine care, and general health care.

Procter & Gamble has a mission to provide superior and quality products to improve the lives of billions of people across the world, at the same time ensuring its products are affordable for the masses.

Its line of brands are currently sold in over 180 countries through grocery stores, membership warehouses like Sam’s Club and Costco, specialty beauty stores, drug stores like Walgreens, department stores like Target and through wholesalers.

Walmart is the company’s largest customer accounting for 15% of total sales in 2019.

Some of the company’s top selling brands are Tide laundry detergent, Bounce dryer sheets, Gain laundry, Charmin and Bounty toilet paper, Pantene and Head & Shoulders shampoo, Herbal Essences hair care, Febreze odor eliminator and Gillette razors. A full list of P&G products and brands can be found here.

Procter & Gamble Brands and Products

Revenue Analysis & Share Buybacks

For full year 2019, Procter & Gamble generated net sales of $67.7 billion and earned an operating income of $5.5 billion, implying an 8.1% operating margin. Revenue grew 1.3% year over year from 2018’s total of $66.8 billion. Operating income and margins would normally be double this number.

In 2019, P&G wrote down the value of its Gillette brand by $8 billion taking an after-tax loss of $5.4 billion. This is due to the declining demand for razor blades in the US as more men grow beards.

Over the last decade, the company’s revenues have dropped 12.7%, from $77.57 billion in 2010 to $67.7 billion in 2019. This drop is attributable to management’s decision to divest 43 brands sold to Coty in July 2015.

These 43 brands generated $5.9 billion in revenues for Procter & Gamble. The brands consisted of hair color and styling, fine fragrances and cosmetics businesses.

With this transaction, Procter & Gamble is now able to focus on 65 key brands that generate over 90% of all revenues and those with the highest operating margins.

Trading on the New York Stock Exchange, Procter & Gamble has a $315.24 billion market capitalization and pays a 2.4% dividend yield. This is 60 basis points higher than the S&P 500 which pays a 1.8% dividend yield.

P&G is truly a global behemoth with 55% of its sales coming from outside of North America. The largest sales category is Fabric & Home Care making up 33% of sales in 2019. The next big category is Baby, Feminine & Family Care at 27%.

Europe and Asia are the 2nd and 3rd largest markets for P&G’s products making up 23% and 10% of total sales.

P&G Sales by Geography

P&G management is committed to rewarding shareholders over the long haul with dividend increases and share buybacks. When a company buys back its own stock, there is less available in the marketplace thus driving up share price as well as earnings per share.

Attached chart shows how Procter & Gamble has grown its annual dividends from $1.64 per share in 2009 to $2.90 in 2019, a compounded annual growth rate of 5.9%. The company has paid back $135 billion to shareholders over the last decade in the form of dividends and share repurchases.

Procter & Gamble History of Dividends and Share Repurchases

Growth Outlook

The company reported its 1st Quarter, 2020 financial results on October 22nd, 2019. Sales in the quarter were $17.8 billion, a 7% increase from the same quarter a year ago. Organic sales also grew 7% thanks to a mix of higher volume, price increases and positive mix. Organic sales grew 10% in the beauty segment, 9% in health care products, 8% in fabric and home care and 5% in baby and feminine care.

Core earnings per share grew 22% to $1.37 year over year thanks to  increase in net sales and operating margin. David Taylor, President and CEO quotes, “We delivered strong top-line growth, profit margin expansion and cash productivity in the first quarter, enabling us to increase our outlook for fiscal year results.

We will continue executing our strategies of superiority, productivity, constructive disruption and improving P&G’s organization and culture to deliver balanced top-line and bottom-line growth along with strong cash generation in a challenging competitive and macroeconomic environment.”

P&G 2020 Financial Results

Management raised its full year 2020 guidance by estimating net sales growth between 3% to 5% and earnings per share growth to 5% to 10%. The company plans to pay $7.5 billion in dividends and authorized share repurchases of $6 to $8 billion.

Some of the headwinds that could derail the strong momentum include a stronger US dollar, significant commodity price increases, geopolitical tensions, etc.

Dividend Growth History

Procter & Gamble is a member of the S&P 500 dividend aristocrats group. These are 57 stocks that have raised their dividends for at least 25 consecutive years without missing even one. In fact, P&G has paid dividends for 129 years and grown them consecutively for 63 years.

P&G has grown its dividend from 23 cents per share in 1990 to $2.95 per share in 2019, a stunning 1282% growth in 30 years. This amounts to a compounded annual growth rate (CAGR) of 8.88%.

P&G Stock Dividend Growth History

Attached chart shows the year over year growth in P&G’s dividend. The company was rapidly growing its dividend in double digits in 1990s and through 2000s. However after the great financial crisis, dividend growth fell to high single digits and currently is sitting in the low single digits range.

P&G Year Over Year Dividend Growth

Dividend Payout Ratio

Procter & Gamble is a dividend aristocrat stock because it has raised its dividend each year for the last 63 years. How awesome is it for investors to be able to invest in a company whose products they use everyday and collect growing dividend checks each year?

Lets examine the the dividend payout ratio for P&G stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 annual report, cash generated from operating activities is $15.2 billion. Capital expenditures came in at $3.3 billion. Let’s calculate the free cash flow.

Free Cash Flow = Cash from Operations – Capital Expenditures

= $15.2 billion – $3.3 billion

Free Cash Flow = $11.9 billion

Dividends Paid in 2018 = $7.5 billion

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $7.5 billion / $11.9 billion

Dividend Payout Ratio = 63%

A dividend payout ratio of 63% is pretty reasonable for a company the size of P&G. It leaves plenty of cash to fund growth and acquisitions as well as buy back shares.

Valuation and Long Term Performance

Procter & Gamble Stock has grown from $7 in January 1990 to $126.4 as of January 2020. This gain is a compounded annual growth rate (CAGR) of 10% over the last 30 years.

During the great financial crisis of 2008, P&G Stock dropped from $74 to as low as $47, representing a drop of 36.5%. This is much better than the drop experienced by the S&P 500 index which fell 56% from peak to trough.

Procter & Gamble is a member of the S&P 500 Consumer Staples index (XLP). Recently, staples companies have been commanding high valuations due to the yield curve inversion in 2019, China US Trade War, geopolitical tensions as well as late cycle recession worries.

As a result, P&G is trading at 25.4 times its forward (2020) earnings versus the S&P 500 which is trading at 18.5 times. With that said, we think the stock is too expensive at these levels.

However, a 10% market correction would present significant buying opportunity for long term investors.

Attached is a 10 year chart comparing the performance of PG Stock (red line) with the S&P 500 (blue line). We can see Procter & Gamble started to under perform the broader market starting in 2014 due to its decision to divest many low margin non-core brands.

However, the stock has caught up to the S&P 500 and over the last 10 years, Procter & Gamble Stock is up 183% while the S&P 500 has gained 198%.

PG Stock versus the S&P 500

Executive Summary

Here is what we like and don’t like about Procter and Gamble Stock.

Likes

  • Consistent dividend growth for 63 years, making this a Dividend Aristocrat.
  • Reasonable 6% dividend growth rate over the last decade.
  • Dividend payout ratio of 63% which leaves room for future dividend growth, smart acquisitions and share repurchases.
  • Management’s turn around plan to focus on key profitable brands with higher margins thus creating shareholder value.

Dislikes

  • A valuation premium to the S&P 500. Trades at 25.4 times forward earnings while the S&P 500 trades at 18.5 times.
  • Declining sales over the last 10 years due to brand divestment.
Market Capitalization $315.24 billion
Dividend Yield 2.4%
Forward PE Ratio 25.4 times earnings
Dividend Growth (5 Year Avg.) 2.8%
Dividend Payout Ratio 63%
EPS Growth (5 Year Avg.) -15.77%
2018 Revenues $67.7 Billion
Gross Margin 49.9%
Net Margin 12.8%

Procter and Gamble Ex-Dividend Dates

Ex-Dividend Date Record Date Announce Date Pay Date Amount Frequency
1/23/2020 1/24/2020 1/14/2020 2/18/2020 0.7459 Quarterly
10/17/2019 10/18/2019 10/8/2019 11/15/2019 0.7459 Quarterly
7/18/2019 7/19/2019 7/9/2019 8/15/2019 0.7459 Quarterly
4/17/2019 4/19/2019 4/9/2019 5/15/2019 0.7459 Quarterly
1/17/2019 1/18/2019 1/8/2019 2/15/2019 0.7172 Quarterly
10/18/2018 10/19/2018 10/9/2018 11/15/2018 0.7172 Quarterly
7/19/2018 7/20/2018 7/10/2018 8/15/2018 0.7172 Quarterly
4/19/2018 4/20/2018 4/10/2018 5/15/2018 0.7172 Quarterly
1/18/2018 1/19/2018 1/9/2018 2/15/2018 0.6896 Quarterly
10/19/2017 10/20/2017 10/10/2017 11/15/2017 0.6896 Quarterly
7/19/2017 7/21/2017 7/11/2017 8/15/2017 0.6896 Quarterly
4/19/2017 4/21/2017 4/12/2017 5/15/2017 0.6896 Quarterly
1/18/2017 1/20/2017 1/10/2017 2/15/2017 0.6695 Quarterly

Source: P&G Investor Relations

Procter and Gamble Stock Price

To view the latest PG stock price, head over to their Investor Relations website under “Stock Quote.”

 

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