Is Procter & Gamble A Good Dividend Pick?

Apr. 8.14 | About: The Procter (PG)


Average annual growth in dividends of 9% during the last five years.

Healthy cushion in free cash flows should allow the company to continue growth in its dividends.

Stabilizing earnings and cost-cutting measures will ensure the future growth of the company.

The Procter & Gamble Company (NYSE:PG) is one of the largest publicly traded companies focused on providing consumer packaged goods in more than 180 countries through worldwide merchandisers in developed as well as developing markets. PG took a great hit after the 2008 recession which blurred its above 100% growth in the early 2000s, leaving the company in recovery mode since then. Moreover, over the last two years, the unsatisfactory performance of the company's stock unimpressed several investors. However, 2013 proved to be exemplary for the company with significant growth observed in shareholders' equity and increased sales volume. In this article, we will discuss the dividends, dividend performance and future prospects of the company.

Dividend Growth

The company has a consistent history of increasing its dividends over the last two decades - with a dividend yield of 3.02%. The company has grown its quarterly dividends at an average annual growth rate of about 9% since 2009. Currently, PG pays an annual dividend of $2.41 per share. Over the last year, the company distributed cash dividends of $6.52 billion. In addition to the dividends, the company also bought back shares worth $6 billion, which takes the total cash returned to shareholders to $12.5 billion.

The sustainability of the dividends is usually gauged by the payout ratio. The payout ratio based on free cash flows for PG is decent among its industry peers, mentioned in the table below. The total dividends paid for the last year were $6.52 billion and the free cash flows for the same period were $10.87 billion, which puts the payout ratio of PG at around 60%. In my opinion, companies with around 60% payout ratio have sizable room to further grow their dividends in the future. The capital expenditures for the company stood at $4 billion in the last year, with an increase of mere 1.1%, compared to the previous year, primarily targeted to support capacity expansion, innovation and cost savings. PG also reported a 12% increase in the operational cash flows over the last year, which should allow the company to grow its future dividends without having an impact on the payout ratio. We have used Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL).

Dividend Per share

Average Growth in five years

Dividends Paid (Billions)

Free cash flows (Billions)

Payout Ratio



















Click to enlarge

Source: Morningstar and SEC Filings

It is evident from the table that the dividend growth of PG holds a decent average among other peers in the industry. Despite a high payout ratio, the company has been able to grow its dividends at an impressive rate over the last five years. PG's current payout ratio gives it some room to further grow its dividends without putting too much pressure on the cash flows. Moreover, the constant capital spending over the last two years and large cost reduction effort, hoping to cut $10 billion in five years, has enabled the company to generate robust free cash flows to grow its dividends in the coming years.

Future Prospects

PG's performance proved to be strong over the last year, with organic sales growth of 3%. The company started to restore growth in the American market that represents over one third of PG's sales and nearly half of its profits. The company is also focusing on delivering efficient operational processes which could reduce the costs and improve manufacturing productivity. Subsequently, the company reduced its costs associated with external marketing spending by more than $10 billion over the period of five years. The cost-cutting aims to restructure the company in order to tackle the slow growth in the developed markets and aggressive expansion in developing markets. The developing markets also started to pay-off with organic sales growth of 8% for the last year. According to the company, each business unit will be permitted to let overall overhead costs rise to no more than 2% over the year.

Innovation plays an important role in the development of consumer goods industries. PG also followed the path and opened a $199 million research facility in Singapore, which is the largest facility in the country and will serve as an international hub for PG's hair, skin and home care and personal health & grooming products. Asia is the fastest growing region and the purpose of developing this research center is to plan for meeting the expected demand from the region by taking into account the requirements of the specific market.


Procter & Gamble struggled hard after the recession to maximize the shareholders return. The company returned capital to the investors through increased dividends and share repurchases, despite nearly stagnant sales volumes. However, the company has been able to stabilize the earnings in with a mix of cost cutting efforts and expansion into the rapidly growing regions. The analysis of the dividends and cash flows shows that the company has further room to grow dividends without putting too much pressure on the cash flows. We believe Procter & Gamble is a solid dividend pick.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.