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Procter & Gamble (NYSE:PG) is one of the strongest dividend-growth firms on the market today. Why? Because over the long run, its future excess cash remaining after paying out expected future growing dividends is still healthy. But by how much could Procter & Gamble actually raise its dividend? Well, let's dig in.

Procter & Gamble Investment Considerations

Procter & Gamble's Dividend

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Please take a gander at our full-page dividend report on P&G in the image above. Please pay particular attention to our forecasts for Procter & Gamble to raise its dividend by 8% in each of the next 4 years, resulting in a dividend of $3.28 per share by the end of its fiscal year 2017. This sounds great thus far, but how can we be confident that Procter & Gamble can achieve these forecasts?

The Safety of Procter & Gamble's Dividend

Well, we measure the safety of a firm's dividend in a unique but very straightforward fashion via the forward-looking Valuentum Dividend Cushion™. The measure is a ratio that sums the existing cash a company has on hand (on its balance sheet) plus its expected future free cash flows (cash from operations less capital expenditures) over the next five years and divides that sum by future expected dividends paid over the same time period. Basically, if the score is above 1, the company has the capacity to pay out its expected future dividends. As income investors, however, we'd like to see a score much larger than 1 for a couple of reasons: 1) the higher the ratio, the more "cushion" the company has against unexpected earnings shortfalls, and 2) the higher the ratio, the greater capacity a dividend-payer has in boosting the dividend in the future. For Procter & Gamble, this score is 1.4, revealing that on its current path the firm has the capacity to cover its future dividends (including the 8% embedded dividend CAGR) with net cash on hand and future free cash flow.

To arrive at the Dividend Cushion score for Procter & Gamble, divide the numerator by the denominator. Remember the denominator includes dividend expansion.

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Source: Valuentum

Let's arrive at the Dividend Cushion in a slightly different way. We typically showcase the Dividend Cushion as a ratio, but it can also be viewed by subtracting the numerator from the denominator. The remaining balance is the firm's excess cash at the end of our 5-year horizon that could be applied to future dividend increases (above and beyond our current forecasts). See the image below. The 'blue box' is the excess cash -- the cushion.

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Source: Valuentum

Now on to the potential growth of Procter & Gamble's dividend. As we mentioned above, we think the larger the "cushion" the larger capacity it has to raise the dividend. However, such dividend growth analysis is not complete until after considering management's willingness to increase the dividend. To do so, we evaluate the company's historical dividend track record. If there have been no dividend cuts in 10 years, the company has a nice growth rate, and a nice dividend cushion, its future potential dividend growth would be excellent, which is the case for Procter & Gamble. The firm is a Dividend Aristocrat.

And because capital preservation is also an important consideration, we assess the risk associated with the potential for capital loss (offering investors a complete picture). In Procter & Gamble's case, we currently think the shares are fairly valued, so the risk of capital loss is medium. If we thought the shares were undervalued, the risk of capital loss would be low.

Procter & Gamble boasts 120+ consecutive years of dividend payments and 55+ consecutive years of dividend increases. Its payout is rock-solid. And we think the firm's future dividend CAGR will be at or north of 8%.

Source: How Much Could Procter & Gamble Raise Its Dividend?

Additional disclosure: PG is included in our Dividend Growth portfolio.