The first quarter is moving along quite rapidly and earnings reports have been pouring in. Although there have been disappointments, with attendant dividend cuts, stocks like (PG) have addressed the issues with firm plans. It appears that many initiatives are coming together simultaneously for PG, including the sale of Pringles to Kellogg and the rapid growth of the Oral-B toothpaste business in Latin America. A major push to increase foreign revenue from the current 45% should be made, especially with rising global GDP and new middle class citizens. To top this off, now is the traditional time for PG to raise its dividend.
In the ultra low interest rate environment in which we find ourselves, the 30 year Treasury bond only yields 3.1%. Defensive stocks in the Consumer Staples sector have increased their yields to the neighborhood of my 4% minimum for strategic investment. At present, my granddaughter has a limit order out for (KMB) at $70, (UL) at $30 and has already purchased (PM) when it dipped to $76 this year. These stocks are highly resilient to bear markets and pullbacks. The one headwind that they face is higher commodity prices. Many retired investors, like myself, require safety of principal and dislike high beta stocks for that reason. I treat these well known large cap consumer staples stocks with 4% yields like Treasury 30 year bonds with growing dividend yields. The growing yield is critical to preservation of buying power during times of stealth inflation (like today-have you looked at the price of gasoline, meat, and other foodstuffs?)
This week I'm looking at a strategic investment in PG, for myself and my grandchildren. I have owned PG since 1980, and joined their company drip plan when it started. Since 2008, I have enrolled PG in the Vanguard Brokerage Drip Plan and am quite pleased with the $0 fees for the dividend reinvestment. I have not made strategic investments in this stock since 2002, due to yield less than 4% and stagnant price appreciation. My yield on average cost is 5.18%. Data from David Fish's CCC charts and Yahoo Finance.
Procter & Gamble -- Consumer Staples Sector. The Procter & Gamble Company provides consumer packaged goods in the United States and internationally. The company offers beauty products, such as cosmetics, female antiperspirant and deodorant, female personal cleansing, female shave care, hair care, hair color, hair styling, pharmacy channel, prestige products, salon professional, and skin care products under the Head & Shoulders, Olay, Pantene, and Wella brands; and grooming products, including electronic hair removal devices, home small appliances, male blades and razors, and male personal care products under the Braun, Fusion, Gillette, and Mach3 brands. This Dividend Champion has 55 years of increasing dividends. The current yield is 3.17%*. The 5-year dividend growth rate is 11.2%, while last year's dividend growth rate was 9.1%. The current P/E is 18.54. The projected earnings per share growth rate for next year is 8.4%, while for the next 5 years it is 8.8%. *It should be noted that the yield does not meet my 4% minimum for strategic investment. My plans are to wait for the upcoming dividend increase to see if my 4% minimum yield is reached. However, with current price appreciation I may have to wait until a market correction, either this summer or early 2013.
A 5-year price chart is shown below:
(Click to enlarge)
As can be seen from the chart, PG has been rather stable averaging $65 for the 5-year period. Only the dip during the Great Recession of January-March 2009 was severe (-30%) and the stock recovered by fall 2009. The next chart shows PG when compared to SPY for the same 5-year period.
(Click to enlarge)
It can be seen from the chart that PG held up a lot better during the Great Recession than the market as represented by SPY.
We now look at the dividend income stream provided by a $10k investment in PG for the period starting in January 2007.
Stock | Quarterly Dividend Rate | Number of Shares | Quarterly Income |
PG | $.31 | 152.99 | $47.43 |
In order to investigate the growth of the dividend reinvestment in this stock, I will create a 5-year spreadsheet (January 2007-January 2012).
| Stock | Date of reinvest | Div Rate | # Shares | Dividend | Drip price | # Shares pur | Total Value | Current Yield |
| Totals | 177.02 | $1,493.64 | 24.03 | |||||
| PG | 01/18/12 | $0.53 | 175.63 | $92.20 | $66.03 | 1.40 | $11,688.89 | 3.18% |
| 10/19/11 | $0.53 | 174.22 | $91.46 | $64.75 | 1.41 | $11,371.88 | 3.24% | |
| 07/20/11 | $0.53 | 172.80 | $90.72 | $64.20 | 1.41 | $11,184.60 | 3.27% | |
| 04/27/11 | $0.53 | 171.40 | $89.98 | $64.02 | 1.41 | $11,062.78 | 3.28% | |
| 01/19/11 | $0.48 | 170.14 | $82.01 | $65.35 | 1.25 | $11,200.75 | 2.95% | |
| 10/20/10 | $0.48 | 168.86 | $81.39 | $63.37 | 1.28 | $10,781.86 | 3.04% | |
| 07/21/10 | $0.48 | 167.54 | $80.75 | $61.11 | 1.32 | $10,318.86 | 3.15% | |
| 04/28/10 | $0.48 | 166.27 | $80.14 | $63.17 | 1.27 | $10,583.23 | 3.05% | |
| 01/20/10 | $0.44 | 165.07 | $72.63 | $60.45 | 1.20 | $10,050.84 | 2.91% | |
| 10/20/09 | $0.44 | 163.81 | $72.08 | $57.49 | 1.25 | $9,489.62 | 3.06% | |
| 07/22/09 | $0.44 | 162.51 | $71.50 | $54.87 | 1.30 | $8,988.36 | 3.21% | |
| 04/22/09 | $0.44 | 161.08 | $70.88 | $49.60 | 1.43 | $8,060.43 | 3.55% | |
| 01/21/09 | $0.40 | 159.97 | $63.99 | $57.57 | 1.11 | $9,273.36 | 2.78% | |
| 10/22/08 | $0.40 | 158.89 | $63.55 | $58.76 | 1.08 | $9,399.74 | 2.72% | |
| 07/16/08 | $0.40 | 157.90 | $63.16 | $63.89 | .99 | $10,151.27 | 2.50% | |
| 04/16/08 | $0.40 | 156.99 | $62.80 | $69.27 | .91 | $10,937.60 | 2.31% | |
| 01/16/08 | $0.35 | 156.20 | $54.67 | $68.84 | .79 | $10,807.30 | 2.03% | |
| 10/17/07 | $0.35 | 155.43 | $54.40 | $70.59 | .77 | $11,025.98 | 1.98% | |
| 07/18/07 | $0.35 | 154.56 | $54.10 | $62.59 | .86 | $9,728.16 | 2.24% | |
| 04/25/07 | $0.35 | 153.72 | $53.80 | $63.53 | .85 | $9,819.35 | 2.20% | |
| 01/17/07 | $0.31 | 152.99 | $47.43 | $65.36 | .73 | $10,046.85 | 1.90% |
It can be seen from the dividend column that the quarterly dividend nearly doubled during this 5-year market period. Notice how the current yield went from 1.9% to 3.18%. With the price dips of the 2008-2009 period, more shares were purchased by the drip. These reinvested shares provide most of the capital gains for the period, since the price started at $65.36 in January 2007 and ended at $66.03 in January 2012. The total capital gain for the 5-years was $1688.89 or 16.88%. This annualized value was 3.17% per year. I will show a graph of the Total Portfolio Value and Yield growth for the period.
(Click to enlarge)
Note the rise in current yield (dividend rate/stock price) from q1 2007 to q1 2012. At the bottom of the Great Recession in second quarter of 2009, it reached 3.55%. The trend of this dividend yield is up, due to the yearly dividend rate increases averaging 11.2% for the past 5-years.
Conclusion: So far in 2012, the S&P500 index is up 8.9% including dividends. In this election year, a strong economy and stock market will be a powerful motivator for voters. Procter & Gamble is faced with competitors that have yields on their dividend growth stocks approaching 4%. In order to stay in the forefront of the Consumer Staples Sector globally, PG must provide growing earnings and dividends. It appears to me that they have gotten serious about this challenge and I will be anticipating the 4% yield point for strategic investment. It is critical that each investor does their own due diligence before making any investment.
