Procter & Gamble: A Reliable Dividend Machine To Hold Forever

Aug. 6.14 | About: The Procter (PG)

Summary

Procter & Gamble is a dividend king which has managed to increase dividends for 58 years in a row. It is the quintessential wide moat company with strong brand recognition.

This dividend machine has boosted dividends by 10.80%/year, and regularly repurchased shares as well. I expect dividends to double in a decade.

The stock is attractive at 17.70 forward earnings and a yield of 3.20%. This is the type of company I expect to hold forever.

The Procter & Gamble Company (NYSE:PG), together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. This dividend king has paid dividends since 1944 and has managed to increase them for 58 years in a row.

The company's latest dividend increase was announced in April 2014 when the Board of Directors approved a 7% increase in the quarterly dividend to 64.36 cents /share. The company's peer group includes Colgate-Palmolive (NYSE:CL), Kimberly-Clark (NYSE:KMB) and Clorox (NYSE:CLX)

Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.

The company has managed to deliver 7.60% average increase in annual EPS over the past decade. Procter & Gamble is expected to earn $4.20 per share in 2014 and $4.52 per share in 2015. In comparison, the company earned $3.86/share in 2013.

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Procter & Gamble also has managed to reduce number of shares outstanding. Since the acquisition of Gillette closed in 2006, the number of shares declined from 3,286 million to 2,894 million.

The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. Procter & Gamble is targeting earnings per share growth in the high single to low double digits, which should not be difficult to achieve given the fact that it is offering products that results in repeat sales by consumers. The growth in emerging market economies is a great opportunity for consumer giants like Procter & Gamble.

Procter & Gamble's long-term strategic goals also include growing organic sales at one or two percentage points faster than market growth in the markets in which the company competes. Those are formidable goals, given the fact that Procter & Gamble is so huge.

The company offers a broad scope of products for every consumer at different price points, and has a sizeable distribution network, which enables it to have a global geographic reach. The company invests in innovation, has a broad portfolio of products and strengths in emerging markets. Procter & Gamble also owns strong brand names, which allow it to maintain pricing power, in order to be able to pass price increases to consumers. The company is the leader is segments such as blades and razors, feminine care, baby products.

The sheer scale of its massive operations and broad geographic reach ensure that the company is able to generate consistent revenue streams. The scale, diversify of products, being a leader in most of your categories and global reach are a definite advantage, which is why I believe the company to have a wide moat. When you have scale, per unit costs for your products are lower than competitors.

Procter & Gamble is going through a $10 billion cost savings program, which would boost earnings. The savings would be realized through elimination of overhead positions, reducing packaging costs, increasing focus on digital advertising at the expense of print as well as squeezing out inefficiencies.

The company might have stumbled as of the past few years, as evident by the lack of earnings per share growth since 2008. The company lost a little bit of focus, and needs to keep driving innovation and win more consumers to engage in repeated purchases of its products. The risk to it includes consumers looking for more value, and switching to cheaper alternatives. As the economic recovery from the Great Recession accelerates however, I believe that consumer spending should be able to find its way to branded products that companies like Procter & Gamble offer.

The annual dividend payment has increased by 10.80% per year over the past decade, which is higher than the growth in EPS.

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An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. If we check the dividend history, going as far back as 1970, we could see that Procter & Gamble has actually managed to double dividends every five years on average.

In the past decade, the dividend payout ratio increased from 40% in 2004 to a high of 68.60% in 2012, before decreasing to 59.30. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

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The return on equity has decreased from 45.70% in 2005 to 17.10% in 2013. The decrease occurred after the acquisition of Gillette in 2005. After that, this indicator has bee generally stable. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

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Currently, the stock sells for 17.70 times earnings and yields 3.20%. Procter & Gamble is already one of my ten largest holdings, which is why further additions there would be less likely for me. I do like the company, and believe it to be one of the few great corporations to hold forever.

Disclosure: The author is long PG, CLX, CL, KMB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.