Procter & Gamble Co. (NYSE:PG), which is a major player in the healthcare products market, is almost legendary for raising its dividend regularly. P&G announced an increase of 7% in April this year, marking the 57th consecutive time that it has raised its dividend. This dependability has led many investors to bank on Procter & Gamble as a "buy and hold" or even better, a "buy and forget" stock. They have also reposed their confidence in the fact that AG Lafley, who led P&G during its boom years in the early 2000s, is back at the helm, replacing Bob MacDonald. However, it should be noted that the balance sheet and the growth indices of the company are not in very good shape. These coupled with the already very high dividend payout ratio, suggest that while the company may be able to continue raising its dividend at regular intervals, the days of 7% dividend raises may be nearly over.
Procter & Gamble's dividend history
P&G is a major player in healthcare and baby care products in the US market, producing and selling popular brands such as Gillette and Pantene, amongst others. Since these products are considered everyday items, P&G investors assume that the company's loyal client base will remain intact and grow over time. Apparent vindication of this belief came from the company's past excellent growth, which has been reflected in regular dividend increases.
However, the primary reason that P&G could raise its dividend so regularly was because it was growing at the same rate. The company was showing EPS growth of 10% annually in the late 90s and early part of the 21st Century. This allowed it to keep the dividend per dollar of profit at around $0.40 throughout the period of the regular dividend raises.
Change in management
As mentioned above, P&G investors took heart from the fact that Bill Ackman's hedge fund Pershing Square had persuaded Bob MacDonald to resign, and be replaced by previous head AG Lafley. Lafley came out of retirement for the job, and is not likely to stay long, but he did initiate some major changes.
One of the changes was the elevation of some executives in charge of departments, so that they now report directly to him. Further, he is focusing on reorganizing the overseas units of P&G. This is significant since the relaxation of the Chinese one-child policy can lead to increased demand for P&G's babycare products, helping it cash in on its current market share of 46% in childcare products segment.
The worrying factors in the balance sheet
These facts are undoubtedly true, but the company's growth has not been very exciting in 2013. It has a negative free cash flow, coupled with an equally dismal invested capital graph. The free cash flow in 2012 was -20% and invested capital in the same period stood at -10%. Operating revenue has grown only 0.47% in the last five years, while foreign sales have rise by 1.62%. Organic growth currently stands at 3.8%.
The company no longer finds itself maintaining the low payout ratio of 42% that it had at the beginning of the recession, since it had to raise the dividend constantly as growth slowed during recession years. The payout ratio now stands at 61% and the company is saddled with $31.5 billion in debt. Add to these the less than exciting growth figures given above, and there appears to be little likelihood of the 7% dividend increases being replicated in the future.
The investor's call
Procter & Gamble has been a great dividend paying stock for so long that it takes some effort to believe that the good days may indeed be over. However, the state of the balance sheet and growth charts do not point to great dividend increases any longer, and one has to reconcile himself/herself to the fact that the "buy and forget" days may be over. This is not to say that dividend increases will stop, but the magnitude (and frequency) of the increases is likely to fall. In such circumstances, the investor who already has P&G in his/her portfolio should "hold" the stock, while the investor who is contemplating buying into the company's stock may consider alternatives.