Procter & Gamble Dividend Stock Analysis for 2010

| About: The Procter (PG)

Summary

  • Procter and Gamble (NYSE:PG) is a very large company with a diverse range of products across the planet.
  • Five year average annual revenue growth is about 9%.
  • Five year average annual earnings growth is about 13%.
  • The dividend yield is currently over 3% and has a five year average annual growth rate of about 12%.
  • The company has an impressive balance sheet with a fairly low level of debt.
  • PG stock looks attractive to me for the long term at current prices in the low $60s.

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Overview

Founded in 1837, Procter and Gamble is now one of the largest companies in the world. It sell its products in over 180 countries and currently has a market capitalization of $180 billion.

Business Segments

PG is divided into three business units:

Beauty and Grooming
In this unit, PG holds brands such as Gillette, Olay, Pantene, Old Spice, Venus, Hugo Boss, Cover Girl, Dolce and Gabbana, and more. Beauty and Grooming accounts for 32% of total 2009 company revenue.

Health and Well-being
In this unit, PG holds brands such as Always, Crest, Oral B, Scope, Tampax, Pepto Bismol, Iams, and more. Health and Well-being accounts for 21% of total 2009 company revenue.

Household Care
In this unit, PG holds brands such as Tide, Swiffer, Puffs, Pampers, Mr. Clean, Downy, Febreeze, Gain, Duracell, Dawn, Downy, Cheer, Bounty, Bounce, Cascade, and more. Household Care accounts for 47% of total 2009 company revenue.

Revenue, Earnings, Cash Flow, and Margins

Procter and Gamble has been adept at growing despite its massive size.

Revenue Growth

Year Revenue
2009 $79.029 billion
2008 $81.748 billion
2007 $74.823 billion
2006 $66.724 billion
2005 $55.292 billion
2004 $51.407 billion
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This represents an average annual revenue growth rate of about 9% over the last five years. This is quite amazing for such a large company.

Earnings Growth

Year Earnings
2009 $13.436 billion
2008 $12.075 billion
2007 $10.340 billion
2006 $8.684 billion
2005 $6.923 billion
2004 $7.257 billion
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This represents an average annual income growth rate of about 13% over the past five years, which again is quite amazing. It should be noted, however, that during 2009, Proctor and Gamble discontinued operations of some of its businesses, so its income from continuing operations is down to $11.3 billion. An example of this is their large sale of Folgers coffee to the Smuckers company.

Operating Cash Flow Growth

Year Cash Flow
2009 $14.9 billion
2008 $15.0 billion
2007 $13.9 billion
2006 $11.4 billion
2005 $8.6 billion
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During these four years, PG has grown operating cash flow by nearly 15% annually on average.

Profit Margin

In 2009, Procter and Gamble had a net profit margin from continuing operations of 14.3%. This number in 2005 was 12.0%.

Dividends

Procter and Gamble stock currently has a dividend yield of about 3.10%. This is fairly high compared to its average dividend yield over the past five years. The company has been paying a dividend for 120 consecutive years and has increased its annual dividend for the past 54 consecutive years. Numbers like this are worthwhile to take a minute to dwell on.

Dividend Growth

Year Dividend Yield
2009 $1.72 3.30%
2008 $1.55 2.30%
2007 $1.36 2.10%
2006 $1.21 2.00%
2005 $1.09 2.00%
2004 $0.98 1.90%
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During these past five years, PG has grown its dividend by about 12% annually on average.

The dividend payout ratio is currently less than 50%, meaning that Procter and Gamble is sending a lot of its money to the shareholders but also has plenty of room for safeguarding and growing that dividend.

Balance Sheet

The company has a LT Debt/Equity ratio of 0.35 and a Total Debt/Equity ratio of 0.46. These low numbers represent a fairly low level of debt, which is a great thing.

Investment Thesis

As can be seen by the above numbers, this massive worldwide financial crisis, which included the biggest recession in United States history since the Great Depression, was a mere hiccup for Procter and Gamble. If one were to look at these numbers without knowledge of the crisis, one would likely acknowledge the existence of only a small recession. This is the strength of Procter and Gamble.

So what does PG offer investors? Consistency, robustness, diversity, safety, growth, and more. PG is known for its strong dedication to developing leaders within its organization and thinking years ahead when it comes to planning. They don’t just figure things out as they go, but instead think well into the future, much like a good investor should do.

The company’s products are diverse, useful, and rather easy to understand. This isn’t a company that can go out of business due to a technological shift, as their products are widespread and fairly simple. The size of the company gives it safety and strength, and so far does not seem to be hampering growth that much.

At its core, Procter and Gamble is a brand management company. Its products are often the best around, but its brands just as important. The company owns 22 billion-dollar brands and 20 half-billion-dollar brands.

The company’s long-term goal is to have a organic sales growth of 4-6%, with 10% diluted EPS growth per year. Developing markets are playing a larger and larger role in the growth of the company, accounting for 29% of sales in 2007 and 32% of sales in 2009.

PG identifies its five major strengths as follows:

Consumer and Market Research
PG does more market research than any other company in the world. According to the 2009 annual report, the company conducts over 15,000 research studies per year.

Innovation
PG continually develops new brands and new products within existing brands.

Brand Building
The majority of PG brands hold #1 or #2 spots in their categories.

Go-To-Market Capabilities
PG is a logistics powerhouse, using its large size to be an efficient and fast supplier of its products.

Scale
PG is among the largest of companies in the world, and leverages its size to gain efficiency in most of what it does.

Risks

Like any company, PG does have some risk. They are resilient, but not immune, to recessions. Tough times lead people to buy cheaper products. They face currency risk due to their global operations, and are vulnerable to changes in commodity costs.

Conclusion and Valuation

I think PG stock is at a pretty good value right now in the low $60s. The P/E is at around 15, long-term growth prospects appear to be solid, the dividend is moderately sized, growing, and safe, debt levels are low. The company always has a long-term outlook, the products are fairly easy to understand and most investors probably use some of them quite often, and the company has a worldwide reach.

Disclosure: I do not have any position in PG at the time of this writing.
You can see my full list of individual holdings here.