Procter and Gamble Shatters Dividend Myths in Current Economy

Procter and Gamble announced late Tuesday that they were hiking their dividend by 10%. This increase was nearly twice what many analysts were estimating and offers important clues about PG's view of the current economy. Here's the reason: Dividends have been under attack over the last year as a result of the weak economy, but also because of many companies' need to conserve capital. For these reasons and others, the notion has developed that even companies with plenty of free cash flow like PG would use this opportunity to set their dividend growth rates on a lower track.

PG's 10% dividend hike blows that idea away. Indeed, it is a message that I believe will be corroborated by many more companies. Companies that are committed to a dividend aren't going to change their ways very much. They will only do so if it is a matter of sound business practices or survival.

PG could have raised their dividend by anything between 5% and 7% and most people would have been happy. In my judgment, by hiking the dividend 10%, PG is making a statement about their view of the unfolding economic landscape. In short, they believe the world hasn't changed as much as the headlines might suggest. They must believe their worldwide business is still on a double digit growth track, and that people won't abandon brand name products for cheaper private label offerings.

Dividends are the most tangible link between a company and its long-term shareholders. We are going through a very difficult time in some industries, but wise companies will think twice before tampering too much with this link to their most patient and dedicated owners.

Thank you Procter and Gamble for showing us your stuff.

Disclosure: Author owns PG stock.

Comments

[Stone Fox C...:]

You don't have to look much farther then GS cutting their dividend. Sure the $15 drop yesterday had some to due with the stock offering, but with the huge beat they shouldn't have sold off that much. But the dividend cut raised eyebrows on the scope of the recovery. Why cut the dividend when they made so much?

That's the theory behind dividend and the short term impacts they have on stocks. To me thats unfortunate as it makes them a rigid part of a companies capital plans. Investors shouldn't view dividend changes so drastically. Sometimes the money can be used in a more beneficial manner.

Apr 15 05:56 PM

[Teak:]

Right, those dividends could be better used to pay management massive bonuses.....yeah yeah, I get it.

Apr 15 08:56 PM

[Big K:]

Thanks for pointing out that P&G is a quality company worthy of being a leader. Dividends are an important investing strategy, and long term ownership in a company like P&G is the way to wealth. The short sellers have been circling around P&G lately, thinking that this stock has not sunk enough, so they have been trying to get some value out of it. Now they are getting spanked. ABT is also another company who raised its dividend 11%.

Apr 16 02:17 AM

[mkreisel:]

Short interest in PG and other similar blue chips are ridiculously low.

It's not short sellers who are beating down PG, it's those cash strapped mutual funds who have to liquidate everything to meet rising redemptions!

Apr 16 02:22 AM

[Larrysyr:]

PG - Blue chip and class all the way.

Thanks for the article.

Apr 16 09:42 AM

[David Van K...:]

The author makes an important point that seems to be missed in a lot of the writing about dividends: The amount by which a company raises (or lowers) its dividend gives great insight into what company management sees in its future.

Because the annual raising of dividends is part of the corporate culture at many companies (such as PG), management will not raise the dividend to any amount if they have any inkling that they might have to freeze it, or cut it, in the future. PG is one of the best-run companies in the world. It's safe to say that management's raising of the dividend by 10% is a great vote of confidence in PG's future.

There has been a lot of recent publicity about companies cutting their dividends. In most cases--read banks--those companies had to cut their dividends to conserve cash and shore up their financial base. The huge slashes (80%-90%-100%) by a few companies brought the overall statistics for dividend-paying companies way down. Too many commentators interpreted that to mean that all dividend investors were getting creamed, or somehow treated unfairly, by those companies. That's simply not true.

An attentive dividend investor examines companies one at a time. Not all companies are in such dire straits as banks. Such well-known companies as Abbott (ABT), Chubb (CB), Coca-Cola (KO), Colgate-Palmolive (CL), 3M (MMM), and now PG have raised their dividends already in 2009. There are many others too numerous to list here. The important lesson is to evaluate companies individually and not mindlessly extend broad averages about dividends (or anything else) to every company.

Apr 16 02:38 PM

[Donald Johnson:]

I don't give analysts a lot of credence, but their ratings are worth a glance.
From wsj.com:

First Call Thomson shows that of 19 analysts, 1 has a strong buy, 6 a buy, 12 a hold (sell). One downgraded the stock in the last week. Price targets: Mean, 58; Median, 58; high 72, low 49, 13 targets. 2 analysts lowered price targets in last 4 weeks.

Analysts' mean rating: 2.69, which to me is a hold or sell, vs. 2.27 last month and 2.24 a year ago. PE 14.02 without extraordinary items, 11.87 with. 5-yr hi 25.52, low 12.78.

Long-term d/e .32. Total d/e .67 vs .53 on 6/30/08 and .54 in trailing 12 months.

See key stats at finance.yaho.com
PEG a reasonable 1.29, assuming that you think anyone has any visibility for any company's earnings in this political and economic environment.

Covered call traders who buy PG at 51.66 and hedge against a market correction by selling the May 47.50 strike call for $4.40 can give themselves an 8.5% cushion on the stock. If the stock falls below the strike and isn't called, this represents an annualized return of about 124%. If the stock is called, the annualized return is 6.8%.

A better CC trade may be to sell the May 50 call at $2.50 for a 4.8% cushion or immediate return. This would generate an annualized return of 71% if the stock fell below 50 and wasn't called. If called, the annualized return would be about 23.74%. Add in the quarterly dividend (3.5% annualized) and you get an even better return. Ex div is April 22.

Just thinking out loud.

Apr 18 10:33 PM