It Is No Longer a Gamble Investing in Procter & Gamble: Part 5



Procter & Gamble (PG) is a Dividend Aristocrat, Champion and blue-chip stalwart that has increased its dividend for 62 consecutive years.  Therefore, it should be no surprise that this blue-chip stalwart has traditionally commanded a higher valuation than most stocks.  Over the past couple of decades at least, it has been a very rare occurrence to be able to invest in this company at a valuation that would be considered reasonable or attractive.  In fact, prior to current time, it took the Great Recession of 2008 and 2009 to bring Procter & Gamble down to reasonable valuation levels.

To put Procter & Gamble’s current valuation into perspective, this blue-chip can be purchased today with a 3.7% current dividend yield which is hovering around the highest it has been over the past two decades.  Furthermore, Procter & Gamble appears attractively valued over virtually every rational valuation metric that prudent value investors might consider.

Procter & Gamble at a Glance

As the following screenshot clearly depicts, Procter & Gamble is a formidable company that has been in business for 180 years.  The company sells products in more than 180 countries, and as previously stated, has increased their dividends for 62 consecutive years.  Procter & Gamble is a diversified consumer staples company with businesses covering 10 product categories generating over $65 billion in annual sales.

The following screenshot provides a breakdown of Procter & Gamble’s net sales and earnings over each of their five reportable segments.  Additionally, the company’s products are quality leaders in each of their categories and subcategories.

Morningstar offered their investment thesis on Procter & Gamble discussing the company’s effort to cull around 100 brands from its mix leaving it with 65 brands.  However, the following excerpt from the report suggests Procter & Gamble’s clout with retailers remains formidable:

“In our view, despite slimming down, we still think P&G will carry clout with retailers, maintaining its scale edge. The 65 brands it maintains in its portfolio include 21 that generate $1 billion-$10 billion in annual sales and another 11 that account for $500 million-$1 billion in sales each year. We believe that by supplying products across multiple categories (such as fabric care, baby care, feminine care, and grooming among others), trusted manufacturers like P&G are critical to retailers looking to drive traffic, both into physical stores and on e-commerce platforms.”

FAST Graphs analyze out loud video: Valuing Procter & Gamble in Multiple Ways

There are numerous ways to examine and then ascertain the fair value of a business public or private.  I am often asked what do I think is the best metric to use when trying to determine fair value?  My answer to this question is simple and straightforward.  I believe that investors should evaluate any stock they are examining over as many valuation metrics as they can.  Therefore, my stock answer is to utilize all of the valuation resources at your disposal.

In addition to providing different perspectives on the relative valuation of a given stock, examining various metrics can also provide insights into the company’s operating strengths and/or challenges.  Moreover, in addition to simply trying to ascertain valuation, I believe that examining various metrics also affords insights into important considerations such as dividend coverage.  In other words, is the dividend safe and can it be expected to continue growing?

Consequently, the following analyze out loud video will look at Procter & Gamble’s valuation and the safety of its dividend utilizing numerous metrics.  These will include adjusted and GAAP earnings, operating and free cash flow as well as EBITDA.  I will also look at important underlying financial numbers associated with the company’s financial statements.

Most importantly, I will also provide insights into what I believe an investor stands to make by investing in Procter & Gamble today.  To my way of thinking, this is a critical step that every investor should make prior to investing in a stock.  Unfortunately, it is also a critical step that often is ignored.  To be clear, what I’m suggesting is that I always calculate a precise range of reasonable return possibilities that I believe an investment in a given stock offers me.  I never invest simply hoping that the price might go up.  Instead, I invest with a specific expectation in mind, and then I closely monitor whether the business is meeting those expectations.  Importantly, I am monitoring fundamental results as they unfold and not short-term stock price movements.

Summary and Conclusions

Procter & Gamble is a blue-chip dividend growth stock with a long history of increasing their dividend.  However, since the beginning of fiscal year 2009, the company has produced anemic earnings growth and below average dividend growth relative to its historical norms.  However, the company is taking actions to reinvigorate future growth.  At this juncture, the consensus of leading analysts are giving them the benefit of the doubt.

Regardless of whether the company reinvigorates its historical normal growth rates or not, I contend the company is fairly-valued based on historical norms.  Most importantly, I believe the dividend is safe and very attractive for such a high quality iconic blue-chip Dividend Aristocrat.  Therefore, I would suggest that investors seeking a quality dividend growth stock with an above market current yield might give Procter & Gamble a closer look.

With my next article in this series, I will be covering PepsiCo (PEP).

In case you missed them, here are links to Part 1 on General Mills (GIS), Part 2 on Kimberly-Clark (KMB), Part 3 on 3M (MMM) and Part 4 on Campbell Soup (CPB).


Disclosure:  Long PG.

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