Dividend Kings In Focus: Procter & Gamble

Up to date on September 18th, 2023 by Aristofanis Papadatos

The Dividend Kings are broadly generally known as a bunch of dividend progress shares to purchase and maintain for the long-term.

These firms have generated sturdy income 12 months after 12 months, even throughout recessions, and have proved their skill to develop earnings steadily over a few years. The Dividend Kings are a bunch of firms with 50+ consecutive years of dividend will increase.

You’ll be able to see all 50 Dividend Kings right here.

You too can obtain an Excel spreadsheet with the total listing of Dividend Kings (plus metrics that matter, resembling price-to-earnings ratios and dividend yields) by clicking the hyperlink under:

Up subsequent in our annual Dividend Kings In Focus sequence is client merchandise behemoth Procter & Gamble (PG), which has paid dividends for 133 years. The corporate has additionally grown its dividend for 67 consecutive years.

Procter & Gamble is without doubt one of the most well-known dividend shares, largely due to its extraordinarily lengthy dividend historical past and broadly recognizable manufacturers.

Years in the past, P&G accomplished a significant overhaul of its product portfolio, together with a big divestment of manufacturers not deemed crucial.

This text will focus on P&G’s portfolio transformation, future progress prospects, and inventory valuation.

Enterprise Overview

Procter & Gamble is a client merchandise big that sells its merchandise in additional than 180 nations and generates roughly $82 billion in annual gross sales. Its core manufacturers embrace Gillette, Tide, Charmin, Crest, Pampers, Febreze, Head & Shoulders, Bounty, Oral-B, and lots of extra.

Throughout P&G’s huge portfolio restructuring over the previous few years, the corporate bought off dozens of its client manufacturers.

Asset gross sales lately embrace battery model Duracell to Berkshire Hathaway (BRK-A) (BRK-B) for $4.7 billion and a group of 43 magnificence manufacturers to Coty (COTY) for $12.5 billion.

Immediately, P&G has slimmed down to only 65 manufacturers, from 170 beforehand. And these manufacturers have been gaining international market share at a wholesome fee over the previous few years.

Supply: Investor Presentation 

The corporate operates in 5 reporting segments primarily based on the next product classes:

Cloth & Dwelling Care
Child, Female, & Household Care
Magnificence
Well being Care
Grooming

Development Prospects

Following P&G’s restructuring, the corporate is now a extra agile and versatile group with improved progress prospects. Whereas P&G divested low-margin companies with restricted progress potential, it held on to its core client manufacturers, resembling Tide, Charmin, Pampers, Gillette, and Crest, which have sturdy progress potential.

As well as, P&G obtained billions of {dollars} from its quite a few asset gross sales and spent a portion of the proceeds on share repurchases. These share repurchases have contributed to progress of earnings-per-share over time.

Margin growth is a significant element of P&G’s earnings progress technique. P&G’s cost-cutting efforts have enhanced its working margins and after-tax revenue margins. Even in an inflationary surroundings, P&G has the power to lift costs, due to its sturdy manufacturers. It has thus applied a number of value hikes over the past two years and therefore it has offset the detrimental impact of value inflation on its margins.

As a part of the restructuring, P&G launched an enormous cost-cutting effort. It minimize prices by $10 billion over the course of its restructuring by way of headcount discount and decrease SG&A bills.

On the identical time, the concentrate on premier manufacturers with pricing energy has resulted in constant gross sales progress:

Supply: Investor Presentation

Within the 2023 fiscal 12 months, the corporate generated $82 billion in gross sales, a 2.5% improve in comparison with FY 2022, as natural gross sales grew 7%.

This outcome featured natural gross sales progress of 11%, 8%, 5%, 8%, and 9% within the firm’s Magnificence, Grooming, Well being Care, Cloth & Dwelling Care, and Child, Female & Household Care segments, respectively.

Adjusted earnings-per-share edged as much as a brand new all-time excessive of $5.90, a 2% improve in comparison with $5.81 in 2022.

Procter & Gamble additionally supplied fiscal 2024 steerage, anticipating 4%-5% gross sales progress and 6%-9% progress of adjusted earnings-per-share.

We’re forecasting 5% annual earnings-per-share progress over the subsequent 5 years.

Aggressive Benefits & Recession Efficiency

P&G has a number of aggressive benefits. The primary is its sturdy model portfolio. P&G has a number of manufacturers that generate annual gross sales in extra of $1 billion.

These and different core manufacturers maintain management positions of their respective classes as properly. These merchandise are related to top quality and therefore customers are prepared to pay a premium for them.

The corporate invests closely in promoting to retain its aggressive place, which it might probably do due to its monetary energy. It additionally invests closely in analysis and improvement. This funding is a aggressive benefit for P&G; R&D fuels product innovation, whereas promoting helps market new merchandise and acquire share.

P&G’s aggressive benefits enable the corporate to stay worthwhile even in periods of recession. Earnings held up remarkably properly throughout the Nice Recession:

2007 earnings-per-share of $3.04
2008 earnings-per-share of $3.64 (19.7% improve)
2009 earnings-per-share of $3.58 (-1.6% decline)
2010 earnings-per-share of $3.53 (-1.4% decline)

As is clear from the above, P&G had a really sturdy 12 months in 2008, with almost 20% earnings progress. Earnings dipped solely mildly within the following two years. This was a really sturdy efficiency in one of many worst financial downturns previously a number of a long time.

P&G additionally carried out very properly in 2020, as customers nonetheless wanted private care and family merchandise throughout the coronavirus pandemic. The patron merchandise big grew its earnings per share 13% in 2020, to a brand new all-time excessive.

Total, P&G has a recession-resistant enterprise mannequin. Everybody wants paper towels, toothpaste, razors, and different P&G merchandise, whatever the financial local weather.

Valuation & Anticipated Returns

Primarily based on our expectation for earnings-per-share of $6.40 for fiscal 2024, P&G is at the moment buying and selling at a ahead price-to-earnings ratio of 23.9.

Our truthful worth estimate for P&G is a price-to-earnings ratio of 20. As such, shares seem overvalued. If the price-to-earnings ratio of P&G reverts to twenty.0 over the subsequent 5 years, the inventory will incur a -3.5% annualized valuation headwind.

Earnings progress and dividends will assist offset the influence of a contracting price-to-earnings a number of. For instance, we count on P&G to generate 5.0% annual earnings progress annually, and the inventory has a present dividend yield of two.5%. Given all these figures, the inventory has a complete return potential of three.9% per 12 months over the subsequent 5 years.

With that mentioned, P&G continues to have enchantment as a dividend progress inventory. The present dividend payout is well-covered by earnings, as evidenced by a wholesome payout ratio of 59%, and therefore the dividend has ample room to continue to grow.

Buyers ought to count on P&G to proceed elevating its dividend yearly for a few years to come back. It has the model energy, aggressive benefits, and profitability to take care of its regular annual dividend raises over the long run.

Last Ideas

P&G has many sturdy qualities that make it a time-tested dividend progress firm. Due to a big reshuffling of its model portfolio years in the past, P&G positioned itself to capitalize on international progress alternatives.

P&G has a protracted historical past of rewarding shareholders with dividends. For its lengthy historical past of annual dividend hikes, P&G earns a spot on our listing of “blue chip” shares.

You’ll be able to see the total listing of blue chip shares right here.

Nevertheless, the present valuation leaves one thing to be desired from a price perspective. Whereas we stay enthused concerning the ongoing progress of the enterprise, we don’t discover shares to be engaging sufficient to purchase right now.

The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend progress traders: