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Summary

  • Iconic company announces 58th consecutive dividend increase.
  • This pushes the yield well above other well-known dividend giants.
  • This often ridiculed "boring" stock still has many likable traits for retirees and income investors.

The Procter & Gamble Company (NYSE:PG) has just announced another routine annual dividend increase. As boring as that might sound, here are some points worth noting about this dividend increase:

  • The company has been paying dividends since 1890.
  • This morning's increase marks the 58th consecutive hike.
  • The latest increase puts Procter & Gamble's yield (3.2%) well ahead than other dividend greats like Johnson & Johnson (NYSE:JNJ) and Kimberly-Clark Corporation (NYSE:KMB).

This article was written in February presenting a few reasons why Procter & Gamble looked enticing, including the expected dividend increase. With the new dividend out, let us take a look at how the dividend basics stack up for this giant.

Payout Ratio:

  • The new annual dividend of $2.57 gives the stock a payout ratio of 69% based on trailing twelve months EPS of $3.72.
  • Based on 2014 and 2015 earnings estimates, the forward payout ratio stands at 60% and 56%.
  • The fact that the payout ratio still looks reasonable after 58 years of increases tells us quite a bit about the earnings prowess and buybacks.

Free Cash Flow: Now that we've established that the dividend seems safe from earnings/share perspective, let us take a look at the free cash flow [FCF] strength.

  • The minimum quarterly FCF over the past 5 years stands at $1.3 billion.
  • The maximum FCF was $4.2 and the average FCF is at $2.67 billion.
  • At the end of 2013, total outstanding shares were 2.36 billion.
  • So the company's quarterly dividend commitment to shareholders is $1.5 billion (2.36 shares times $0.6436 dividend/share).
  • In a nutshell, free cash flow looks strong enough to cover and increase dividends. Only two quarters in the last 5 years recorded FCF below the quarterly dividend commitment.

Dividend Growth Rate: Procter & Gamble's dividend growth over the past few years reeks of maturity. While some might see it as a red flag, it is a quality that most income investors/retirees seek in their stocks. The dividend growth rate has been very predictable between 7% and 9% over the past 5 years. This rate looks set to continue for the next few years at least as earnings per share are also expected to grow at the same pace.

(Source: Yahoo Finance)

Extrapolation:

  • The table below assumes a safe 7% dividend increase/yr for the next 10 years.
  • The yield on cost is very likely to double even under pessimistic scenarios.
  • More optimistically, if the earnings grow at 8%/yr as expected, the EPS will be $5.46 in 5 years. If the company sticks to its current payout ratio, the annual dividend/share will be at $3.77. That represents a 45% increase in dividends from the current level.

(Source: Current dividend and share price from Yahoo Finance)

Conclusion: Despite the boring looks of this stock, this stock's attributes should attract almost every one investing for the long term:

  • a massive dividend growth streak
  • a moderate buyback (shares count reduced by 7% over the past 5 yrs)
  • a low beta of 0.40
  • price target that's 10% away from current price (AKA there is something for those seeking capital gains too but at low volatility.)
  • 5 year expected earnings growth of 9%/yr

With questions being asked about how long can the high-flyers keep going, now might be a good time to look at safer stocks like Procter & Gamble. If you believe in the 52 week trading range, the stock is right at the middle now.

Source: Procter & Gamble's Dividend Increase