Procter & Gamble A Rising Dividend Star

Feb.24.12 | About: The Procter (PG)

By Mark Bern, CPA CFA

Procter & Gamble (NYSE:PG) has increased its dividend for 55 consecutive years. Over the past five years the company has increased dividends at a compound annual growth rate of 11.4% from $1.15 to $1.97 per share. Earnings per share barely dipped during the great recession from $3.64 in 2008 to a low of $3.53 in 2010 and have recovered to $3.93 in 2011. Many companies' earnings recovered during that time period, but few fell so little.

The company has 22 "mega" brands, each of which produces more than $1 billion in revenue annually and at least 20 more brands that produce between $500 million and $1 billion in revenue annually each. PG builds brand loyalties, extends brand values, and expands into new markets. The company is innovative, always creating new non-durable products for massive consumption.

PG sells its products in more than 180 countries around the globe. That is tremendous reach. The company is expanding in emerging and developing markets like India and China and constantly introducing new brands to customers in developed countries ... think Swiffer. More than 45% of revenue comes from outside the U.S. and that percentage will continue to grow as hundreds of millions of new consumers begin to improve their lives. And, for the first time in history, those hundreds of millions of people will be able to afford to be consumers of PG products.

Think in terms of the populations in China, India, Brazil and Indonesia. The middle class in these countries just expanded over the last decade by more than the entire population of the U.S. New consumers are being created around the world at an unprecedented rate and PG is perhaps better positioned to take advantage of that trend than any other company on the face of the earth. Of course, that's just my opinion. But you can see what gets me excited, right?

The company recently announced plans to cut $10 billion in costs over the next four years. The company plans to eliminate 4,100 jobs in addition to the 1,600 job cut that was announced previously. The stock price jumped on the news. The prices of commodities that the company uses in its products have been rising faster than the company can pass them along to consumers through price hikes while remaining competitive. These are difficult times for household products companies as margins are getting squeezed by rising costs and competition by generic products' lower prices. PG has decided to do something about it. And the results could make PG more price competitive for the next decade as global growth slows, especially in developed nations. Let's take a look at the report card for PG.

Ratio/ Measure

PG

Industry Ave.

Pass / Fail

Ave. Annual 5pYr. Earnings Growth

8.5%

2.6%

Pass

Net Profit Margin

14.3%

11.8%

Pass

Debt to Total Capital

25%

27%

Pass

Return on Total Capital

13.5%

12.5%

Pass

Dividend Yield

3.3%

2.7%

Pass

Payout Ratio

49%

45%

Neutral

Price-to-earnings

19.5

16

Fail

Click to enlarge

While the company gets a pass rating overall, the P/E ratio seems to be at more of a premium that I would like. In other words, it's not a bargain at the current price. This is company to buy on dips and hold on to forever.

The company has an S&P credit rating of AA and pays a dividend of 3.2%. It may seem old school and boring to some but I own it and I'm glad I do. Whenever I think that I may be able to do a little better with another company I just remind myself of one thing: 55 consecutive years of dividend increases.

Disclosure: I am long PG.