Friday, January 23, 2009

Procter & Gamble (PG) Dividend Stock Analysis

The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care.

Procter & Gamble is a dividend aristocrat as well as a component of the S&P 500 index. One of its most prominent investors includes the legendary Warren Buffett. Procter & Gamble has been increasing its dividends for the past 52 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 3.10 % to its shareholders.


At the same time company has managed to deliver a 12.10% average annual increase in its EPS since 1999.

The ROE has decreased from 35-45% range in early 2000s to 18% by 2008. The severe drop in ROE seems to be mainly an effect of the Gillette acquisition.


Annual dividend payments have increased by an average of 10.90% annually over the past 10 years, which is lower than the growth in EPS.
An 11% growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1973, PG has actually managed to double its dividend payment every seven years on average.

If we invested $100,000 in PG on December 31, 1998 we would have bought 2190 shares (Adjusted for a 2:1 stock split in 2004). In March 1999 your quarterly dividend income would have been $312. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1069 by October 2008. For a period of 10 years, your quarterly dividend income would have increased 181%. If you reinvested it however, your quarterly dividend income would have increased over 243%.

The dividend payout has remained below 50% for the majority of our study period, with the exception of a brief spike in 1999 and 2000. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that PG is attractively valued with its low price/earnings multiple of 15, a not too high DPR. However the current dividend yield is below the 3% minimum threshold that I have set. Two of PG’s competitors, JNJ and KMB both trade at P/E multiples of 13 times earnings. JNJ currently spots a 3.20% dividend yield, while KMB has a 4.40% yield. I would consider adding to my PG holdings on dips below $53.30.

Relevant Articles:

- Dividend Aristocrats List for 2009
- Dividend Aristocrats
- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
- Best CD Rates

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2 comments:

  1. Here is a great example of why dividend yield should be irrelevant to your investment decision:

    1. You have found what you consider to be a great stock and you have well articulated the reasons why, then you say you WON'T invest because its dividend return has dropped below some arbitrary threshold that has NOTHING to do with how P&G may perform in the future.

    2. Warren Buffett owns the stock, which probably has little to do with the dividend; yet, Warren's investment vehicle - Berkshire Hathaway - itself issues NO dividends. Which company are you looking to invest in:

    The dividend issuer (P&G) which has grown at a little over 10% p.a. or the non-dividend issuer (BRK) which has returned over 20% p.a.?

    3. Finally, you then show how REINVESTING the dividends produces an even better return. Aren't there a number of even better companies than P&G that return more (with just as long a history of being 'safe investments') that produce even better financial results because they reinvest their own dividends, by not issuing them in the first place - instead using the funds to grow the business?

    Frankly, the whole dividend-for-dividends-sake argument is lost on me ...

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  2. AJC,

    Thanks for stopping by. First of all I try purchasing great dividend growth stocks at a discount. PG has similar characteristics as JNJ, but the latter has a larger current yield. Thus, if I cannot purchase PG at a discount I won't add to it. I would rather miss a move up than overpay for a stock.
    I have identified tha fact that PG was a great company in the future, but I can never tell you that it would perform as well over the next decade. What happens if PG stops growing its dividend? Then i will be stuck with a low yielding stock that doesn't grow its dividends.
    The fact that Buffett owns the stock is immaterial to me. BRKa doesn't pay dividends, which is more of an exception rather than the rule since most of its holdings are in dividend stocks. Furthermore BRK.a hasn't been growing at 20% for over a decade..

    I would rather re-invest the dividends myself than have "the company" do it for me. Many companies like PFE or GE did stock buybacks at inflated stock price levels rather than send the extra cash to shareholders directly.

    Dividends are important because they provide you with a return on investment even during a bear market. Reinvested dividends have accounted for over 90% of stock market returns since 1871. Dividends typically account for 40% of annual avg stock market returns. Capital gains are important, but they are more volatile and thus less reliable for investors who live off their investments in retirement.

    ReplyDelete

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