Dividend Kings In Focus: Procter & Gamble – Positive Dividend Get hold of US

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

The Dividend Kings are extensively often known as a bunch of dividend development shares to purchase and maintain for the long-term.

These firms have generated robust earnings yr after yr, even throughout recessions, and have proved their capability 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 possibly can see all 50 Dividend Kings right here.

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

Up subsequent in our annual Dividend Kings In Focus collection is shopper 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 among the most well-known dividend shares, largely because of its extraordinarily lengthy dividend historical past and extensively recognizable manufacturers.

Years in the past, P&G accomplished a serious overhaul of its product portfolio, together with a major divestment of manufacturers not deemed needed.

This text will talk about P&G’s portfolio transformation, future development prospects, and inventory valuation.

Enterprise Overview

Procter & Gamble is a shopper merchandise big that sells its merchandise in additional than 180 international locations 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 plenty of extra.

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

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

Supply: Investor Presentation 

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

• Material & Residence 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 development prospects. Whereas P&G divested low-margin companies with restricted development potential, it held on to its core shopper manufacturers, equivalent to Tide, Charmin, Pampers, Gillette, and Crest, which have robust development potential.

As well as, P&G acquired 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 development of earnings-per-share over time.

Margin enlargement is a serious element of P&G’s earnings development technique. P&G’s cost-cutting efforts have enhanced its working margins and after-tax revenue margins. Even in an inflationary atmosphere, P&G has the flexibility to lift costs, because of its robust manufacturers. It has thus applied a number of value hikes during the last two years and therefore it has offset the destructive impact of price inflation on its margins.

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

On the identical time, the deal with premier manufacturers with pricing energy has resulted in constant gross sales development:

Supply: Investor Presentation

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

This end result featured natural gross sales development of 11%, 8%, 5%, 8%, and 9% within the firm’s Magnificence, Grooming, Well being Care, Material & Residence 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% enhance in comparison with $5.81 in 2022.

Procter & Gamble additionally offered fiscal 2024 steering, anticipating 4%-5% gross sales development and 6%-9% development of adjusted earnings-per-share.

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

Aggressive Benefits & Recession Efficiency

P&G has a number of aggressive benefits. The primary is its robust 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 nicely. These merchandise are related to prime 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 do because of its monetary power. 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 achieve share.

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

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

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

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

General, 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

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

Our honest 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 development and dividends will assist offset the affect of a contracting price-to-earnings a number of. For instance, we anticipate P&G to generate 5.0% annual earnings development 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 yr over the subsequent 5 years.

With that mentioned, P&G continues to have enchantment as a dividend development 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 anticipate P&G to proceed elevating its dividend yearly for a few years to return. It has the model power, aggressive benefits, and profitability to keep up its regular annual dividend raises over the long run.

Ultimate Ideas

P&G has many robust qualities that make it a time-tested dividend development firm. Due to a major reshuffling of its model portfolio years in the past, P&G positioned itself to capitalize on world development 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 record of “blue chip” shares.

You possibly can see the total record of blue chip shares right here.

Nevertheless, the present valuation leaves one thing to be desired from a price perspective. Whereas we stay enthused in regards to the ongoing development of the enterprise, we don’t discover shares to be engaging sufficient to purchase at the moment.

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