Proctor and Gamble Just Raised Its Dividend for the 65th Consecutive Year
Procter and Gamble (PG) is one of the more interesting stocks in the consumer packaged goods space right now. It wasn’t all that long ago that this illustrious company was being beaten down by the market, due to its poor performance during 2015 and 2016 when the company posted back-to-back years of negative earnings growth (something that is very rare in the long-term history of this stock). This period sparked a significant restructuring of PG’s operations and brand portfolio, inspired by an ugly proxy fight between Procter’s management and Trian Fund Management, led by Nelson Peltz, a famous activist investor. At the end of the day, all’s well at that ends well in the activist investment world. Eventually Peltz was awarded board seats and the leadership shake up has served as a catalyst for the major turnaround of this mature stock. During its past 2 fiscal years, PG has posted double digit earnings growth. These days, the company’s operational growth puts it near the top of its peer group. However, while sales and earnings continue to grow nicely, the stock has still struggled year-to-date, creating an interesting opportunity for investors.
PG shares are down 3.7% year-to-date, which pales in comparison to the S&P 500’s 11.5% gains. This underperformance may seem odd to some, due to the fact that PG has posted two quarterly earnings results thus far during 2021, both of which have involved top and bottom-line beats, relative to analyst expectations. However, looking at the company’s valuation, we begin to see why there is a tug-of-war going on right now between the bulls who are focused on the company’s strong growth turnaround and the bears who say that shares are overly expensive.
Today, PG shares are trading with a blended price-to-earnings ratio of 24.2x attached to them. Looking at full-year earnings expectations for the company in fiscal 2021, we see a forward looking price-to-earnings ratio of 23.8x. Both of these figures are well above the stock’s long-term (20-year) average price-to-earnings ratio of 19.9x.
Touching upon potential overvaluation, 5-star Nobias analyst, The Individual Trader, recently posted an article on Seeking Alpha which explained this valuation scenario. They note that the company’s RSI is in decline after a strong top in the 90 range and said, “Shares actually presented a similar set-up back in 2017 when the share price of P&G continued to rise but momentum was once more faltering. This led to a 20%+ down-move in the share price in the space of four months which in hindsight presented an excellent long-term buying opportunity.”
The Individual Trader combined this technical set-up with some more fundamental analysis as well, saying, “Many investors may be waiting for this potential down-move to happen due to shares being perceived as being overvalued. The forward sales multiple of 4.57 as well as the forward book multiple of 7.11 definitely come in on the high side compared to the sector as well as P&G's historic averages. Nevertheless, P&G cannot be blamed for the market loving this company and we see plenty of evidence of this when we view the profitability metrics. EBIT margin of 24.13% as well as trailing operating cash flow of $19.03 billion are well above average for P&G and explains in part why shares have rallied well over 20% since March of last year.”
Valuation arguments are tricky to make. There are so many metrics in play that parties sitting on both sides of the bear/bull aisles can typically find data to justify their stances. Really, only with the benefit of hindsight, can we truly see the impact of valuation on share price movement. But, in the meantime, this company is doing all that it can to sway investor sentiment towards the bullish end of the spectrum.
During the company’s fiscal third quarter, PG’s net sales increased by 5.2%, totaling $18.1 billion. This $18.1 billion revenue figure beat analyst expectations by $150 million. During the quarter, PG’s organic sales growth came in at 4%. On the bottom-line, PG produced diluted net earnings per share of $1.26, which represented 13% year-over-year growth relative to reported earnings-per-share and 8% year-over-year growth relative to core earnings-per-share.
Charles Sternberg, a 4-star Nobias analyst who writes for Happi, touched upon PG’s segment results in a recent article. He said that the company’s Beauty segment posted 7% y/y growth, its Grooming segment posted 4% y/y growth, its Healthcare segment posted 3% y/y growth, its Fabric and Homecare segment posted 7% y/y growth, and its Baby, Feminine, and Family Care segment posted -1% y/y growth.
During the fiscal Q3 report, PG’s Chairman, President, and CEO, David Taylor, said: “We delivered another quarter of solid top-line, bottom-line and cash results in what continues to be a challenging operating environment. We remain focused on executing our strategies of superiority, productivity, constructive disruption and improving P&G’s organization and culture. These strategies enabled us to build strong business momentum before the COVID crisis and accelerate our progress during the crisis, and they remain the right strategies to deliver balanced growth and value creation over the long term.”
PG’s operating income came in at approximately $3.8 billion during the quarter, up 10% on a year-over-year basis. This strong bottom-line performance allowed the company to increase its dividend as well. 5-star Nobias analyst, Demitri Kalogeropoulos, recently highlighted PG’s dividend growth outlook in his article, “Two Dividend Giants To Buy Before Their Next Payout Hike”. In this piece, Kalogeropoulos highlighted PG’s strong sales growth, saying, “Organic sales jumped 8% in P&G's last outing and are expected to rise for the full year following a spike in fiscal 2020.” He then went on to highlight the company’s bottom-line success, saying, “P&G generated $10 billion of operating cash in the past six months, compared to $8.5 billion a year earlier.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Kalogeropoulos penned this piece in late March, before the recent dividend announcement. In his article, he said, that the company’s recent success “gives management the flexibility to announce a hike in April that should be at least as big as last year's 6% hike.”
Well, it turns out he was correct.
On April 13th, PG announced that it was increasing its quarterly dividend by 10%, raising the payment from $0.7907/share to $0.8698/share. This increase extends PG’s annual dividend increase streak to 65 consecutive years. And, if six and a half decades of annual dividend increases doesn’t impress you, then maybe this statement that the company made during its quarterly report will: “P&G has been paying a dividend for 131 consecutive years since it’s incorporation in 1890.” Regarding this amazing streak, Kalogeropoulos said, “That kind of streak is only possible because of its dominant hold on several consumer staples niches, including paper towels, detergent, and shaving care.”
It’s also worth mentioning that PG’s shareholder return story is not limited to its dividend growth. During the Q3 report, management said, “P&G expects to pay more than $8 billion in dividends in fiscal 2021. The Company increased its outlook for common stock repurchase from up to $10 billion to approximately $11 billion in fiscal 2021. Combined, P&G now plans to return about $19 billion of cash to shareowners in this fiscal year.” Capital return plans like this from a well established blue chip name is why PG remains one of the most widely owned stocks by hedge funds on Wall Street and a favorite amongst retail investors as well. So, while investors wait and see if the company’s share price will rebound throughout the remainder of 2021, they can rest assured that PG management will continue to be quite generous with its cash flows.
Disclosure: Nicholas Ward has no position in any equity mentioned in this article.. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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