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Finanzas: Procter & Gamble: From Investors To Consumers

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This article has been written by Olivier Gélinas for Dividend Stocks Rock.

Procter & Gamble (PG) is a pillar in its industry and a model for a number of businesses: impressive brand portfolio, strong volume of sales, presence in every market, a CEO’s dream! PG also pleases shareholders in various ways. On top of a well-informed management, the company’s dividend distribution is off the charts. Now, in a 62-year of dividend increases, shareholders are not disappointed by this dividend king. Although the retail industry is starting to face changes, I am not worried for PG. This 65 brands giant knows the market and more importantly, it knows its customers.

Understanding the Business

According to Forbes, PG is the world’s largest household and personal care manufacturer. The 180 years old company distributes its many brands in more than 180 countries, generating almost $67B in sales per year. Those sales are coming from its 10 major product categories. Among its numerous brands, we can find the well-known Tide, Downy, Pampers, Bounty, Charmin, Always, Old Spice, and much more.

Source: Procter & Gamble’s website – P&G At a glance

Besides its great products variety, PG benefits from a good geographic diversification. Although the company could be focusing on emerging markets in the upcoming years (more on that later), PG is well positioned in its current markets. Of course, behind all of those sales are 92,000 dedicated employees who help smoothing the sailing of the operations.

Growth Vectors

Source: YCharts

Management’s vision of the future is simple but effective. The company has built a tremendous brand portfolio from which basically everyone is finding what it needs. One of its strongest growth vectors is its name itself. By always stepping up its standards, by delivering ever-increasing volumes to retailers and by never letting shelves empty, PG is building a trustworthy bond between every party involved.

Finally, PG’s management has a huge role to play in the company’s brands portfolio. With around 65 different labels, decisions must be made on which ones to keep and which ones to let go. This is crucial if PG wants to keep its operating margins safe. As a result, many segments were sold between 2016 and 2017 in order to achieve such goals.

Latest quarter in a flash

On October 19, the company reported the following results:

  • EPS of $1.12, beating estimates by $0.03.
  • Reported revenues of $16.69B, a 0.2% increase, beating consensus by $220M.
  • Declared dividend of $0.7172/share, a 4% jump compared to last’s year same period.

David Taylor, Chairman and CEO of PG, seemed happy about those figures:

We generated strong consumption, organic volume and organic sales in the first quarter. This keeps us on track to deliver our top- and bottom-line targets for the fiscal year.”

Dividend Growth Perspective

When looking at PG’s dividend history, there are no compromises. A 62-year streak of dividend increases and the dividend king title are indeed impressive. Increases are not the most prominent ones, being in the low to mid-single digits, but this is spot on for a defensive stock.

Source: YCharts

I must admit that defensive consumer stocks are usually not the most attractive in terms of yield. However, the 3%+ mark for this stock is truly pleasing. Considering PG’s growth plan, I don’t see why this figure would dip deep down in the near future.

Source: YCharts

Even if some consider a payout level of 70% a high one, it is quite a normal number in the consumer retail sector. PG’s acquisitions and other investments plans could affect its payout levels, but I don’t see any immediate threats regarding their sustainability.

Potential Downsides

PG’s business is all around the world. With that in mind, lots of concerns arise when thinking about currency exposure. Selling in 180+ countries is time-consuming in terms of hedging activities. With volatility increasing in current markets, it will become a real hassle to correctly and effectively protect those operations from any currency losses.

Another concern on PG’s sales resides in its emerging markets activities. During the last few years, the company was eager to acquire new and innovative products to fulfill customers’ needs, which may not be a bad thing. However, the company’s focus is a little too much on product acquisitions rather than on consolidating its market shares. In the meantime, many smaller companies have taken open market in forgotten regions. While this might not be a big concern for now, PG’s management might consider an intensive marketing campaign, which, in turn, might not fit in its current budget.

Valuation

Trading at approximately 4x its PE ratio, investors should wonder if an investment opportunity still exists.

Source: YCharts

To find out, I am using a dividend discount model. I used an annualized $2.87 dividend payment along with a standard 9% discounting rate. I also set a short run growth of 5% and one of 6% for a longer run.

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $2.87
Enter Expected Dividend Growth Rate Years 1-10: 5.00%
Enter Expected Terminal Dividend Growth Rate: 6.00%
Enter Discount Rate: 9.00%
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $167.31 $111.93 $84.22
10% Premium $153.37 $102.60 $77.20
Intrinsic Value $139.43 $93.27 $70.18
10% Discount $125.48 $83.95 $63.16
20% Discount $111.54 $74.62 $56.15

Please read the Dividend Discount Model limitations to fully understand my calculations.

The intrinsic value given by the model currently suggests that the stock is undervalued. While markets are valuing the stock at around $86 a share, the calculations here would hover around $93. While the difference is highly subject to the model’s inputs, I think investors might have a buying window now.

Final Thought

With everything factored in, I’m really impressed by this retail giant. It showed to its customers a lot of loyalty and will to better suit their needs. Its key metrics are showing great progress, which is telling me that the company should be capitalizing on this momentum in order to gain further market shares.

For investors who are looking for a reliable income at a decent price, I would definitely look into PG’s stock. A 3.2% yielder with such an established business is a win for me. In addition, the management really seems to take the future of the business seriously, which tells me dividend increases should be coming in for many years.

Seriously, if you made it this far, it’s because you liked what you read. Don’t be a stranger; leave a comment and tell me what you think! I’m asking you one more thing; click on “follow” button (it’s orange, you can’t miss it!) and you will get notified each time I write a great piece like this one.

Disclosure: We do hold PG in our DividendStocksRock portfolios.

Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

Many investors focus on dividend yield or dividend history. I respectfully think they’re making a mistake. While both metrics are important, aiming at companies that have and show the ability to continue raising their dividend by high single-digit to double-digit numbers will make your portfolio outperform others. When a company pushes its dividend so fast, it’s because it is also growing their revenues and earnings. Isn’t this the fundamental of investing – finding strong companies that will grow in the future? If you are looking for a great combination of dividend and growth, check out my picks at Dividend Growth Rocks.

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