It looks like shares of Procter & Gamble (gPG) have started to pick up steam in recent weeks, moving up from the $60-$63 range to the close of $66.00 per share on Wednesday. Looking at the past eleven years, it may appear that shareholders of P&G haven't been richly rewarded over the time frame-P&G hit a high of $59.20 in 2000, fell to the $40s and $50s for the next six years until hitting $75.20 per share in 2007, and then trading in the low $60s and upper $50s for most of the past three years. Considering that, on a split-adjusted basis, shares have only climbed to $66 from a high of $59.20 eleven years ago, it may at first glance appear that Procter & Gamble hasn't taken care of investors over that time frame. That is, until you consider the long-term strength of Procter & Gamble's dividend.
In 2000, Procter & Gamble paid out $0.64 per share annually in dividends, and they have raised them annually by 11.0% since then, giving investors of Procter & Gamble a total of $1.97 per share in annual dividends this year.
Let's pretend that a hypothetical investor put $10,000 into Procter & Gamble stock in 2000, and paid $59.20 (shares of Procter & Gamble traded between $26.40 and $59.20 per share in 2000, so we're not using a charitable starting point---and keep in mind that P&G earned $1.48 per share in 2000, which means that investors who bought in at $59.20 would have paid 40x earnings, which no intelligent investor would pay for a mature blue-chip. That is to say, getting a 2.5% earnings yield on an American blue-chip does not usually qualify as an intelligent investment with a built-in margin for error). That $10,000 investment would have purchased 169 initial shares of Procter & Gamble stock. Here's a look at the growing dividend income generated over that time period without reinvesting any of the dividends:
As the chart shows, the annual income on the 169 shares tripled over the eleven year stretch, growing from $108.16 in 2000 to $332.93 in 2011. In total, P&G generated $2,394.73 in dividends over the time frame, contributing more to total returns than stock price appreciation. Since the price of the 169 shares grew from $59.20 to $66, our potential investor could now cash out his shares for $11,154 for a gain of $1,154. Looking at the dividends and share price appreciation combined, our hypothetical investor would have made $3,548.73 in total over eleven years, which is a gain of 35.48% over the course of the decade.
Considering that those returns come out to 3.22% annually over the past eleven years, it may appear at first glance that P&G hasn't been a winner for investors, until you take into account the Benjamin Graham dictum "Price is Paramount." It would be completely foolish for anyone to have paid for $59.20 for a share of Procter & Gamble in 2000. Paying 40x earnings for a mature, blue-chip consumer staple is the exact opposite of sensible value investing; anyone who establishes a position in any consumer staple, be it Colgate-Palmolive (CL), Coca-Cola (KO), PepsiCo (PEP) or Johnson & Johnson (JNJ), with only a 2.5% earnings yield should expect very subpar investing returns.
Think about it: Anyone who paid $59.20 per share in 2000 for Procter & Gamble would have been buying the shares when the dividend was paying just a smidge over 1%. What dividend growth investor recommends purchasing blue-chip stocks with a dividend barely over 1%? None, because in this case, the shares were so wildly undervalued that it was almost certainly a recipe for disaster. But in the case of P&G, the fact that the dividend was able to triple and earnings per share were able to more than double over the coming eleven years demonstrate just how strong this blue-chip company is -- even if you made your initial purchase at a price at least double or maybe triple what any sensible value investor would recommend, the shares were still able to produce a 3% annual gain, a true testament to the margin of safety built into this consumer staple behometh.