The road to the creation of wealth in the U.S., the greatest economic power the world has ever seen, has been paved by owning and operating a business for many years, not a few weeks. Of course, this requires both monetary and human capital. Absent this, our markets have provided every one of us the option of owning a small portion of an operating business through the purchase of common stock.
Why is it that so many investors, both professionals and individuals, have forgotten this? To most people today, investing has to do with buying the market in its entirety, not owning a business. Next in line are those investors who think the market is nothing more than a great casino where one places a bet in hopes of striking it rich.
When the majority thinks the market stinks and the gamblers have taken a break from the gaming tables, shrewd business buyers jump at the opportunity to gain ownership interest at an attractive price. One such opportunity today is Procter and Gamble (NYSE:PG).
PG was created in 1837 by William Procter and James Gamble. In 1880, the company first produced Ivory soap. In 1887 it created one of the world’s first profit-sharing plans, giving workers an ownership interest in the company. Since then it has created such familiar products as Crisco, Tide, Prell and Duracell batteries. Procter and Gamble is responsible for many more consumer products that each of you have used, or continue to use, daily.
PG has raised its dividend every year for the past 54 years; this year is no exception, with an increase of $0.21 per share to $2.10 annually. The company has increased sales and book value per share nine of the past 10 years, while increasing shareholder equity from $12 Billion to $61.5 Billion. It has averaged 26.84% return on shareholder equity for the last 10 years − a pretty good sign of management’s capabilities.
What is important to all business owners is the amount of excess cash the business produces as well as the increased value of the remaining assets. The company has paid its owners a total of $11.56 per share in dividends these past 10 years, and has still been able to grow net assets by 411.5%. Today, because the market stinks and the gamblers have left the table, you can purchase an ownership interest in this great company at a very reasonable price.
The company’s current dividend yield (Dividend/Current Price) for the past 10 years has ranged between 1.08% and 3.74%, with an average of 1.98%. That would equate to a $106.06 market price, given the current $2.10 payment. Just as important, the company’s market price has traded between 12.26x trailing earnings per share and 26.33x these past 10 years. That is an average of 21.62x which would equate to a market price of $82.59 based on 12-month trailing earnings of $3.82.
If you can forget about the smell of the market and think in terms of buying a business at a reasonable price, then plug your nose and become an owner of Procter and Gamble.
Disclosure: I am long PG.