Procter & Gamble Is A Solid Pick For Dividends

| About: The Procter (PG)

Procter & Gamble (PG) is the world's largest consumer product manufacturer, with an impressive portfolio of well-known brands such as Gillette, Braun, Old Spice, Tide, Duracell, Charmin, and many others. Revenue in fiscal 2011 was over $82 billion.

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Procter & Gamble stock currently trades at $66.78 and has a projected dividend yield of 3.14%. Below is the ten-year dividend history.

Year Dividend Growth
2002 $0.80 8.10%
2003 $0.88 10.00%
2004 $0.98 11.36%
2005 $1.09 11.22%
2006 $1.21 11.01%
2007 $1.36 12.40%
2008 $1.55 13.97%
2009 $1.72 10.97%
2010 $1.885 9.62%
2011 $2.057 9.09%
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Dividend growth has been incredibly consistent over the past 10 years, ranging from 8-14% annually. The quarterly dividend was increased this year to $0.562 from $0.525, which puts the 2012 dividend at $2.21 for growth of 7.5%. I'll calculate the payout ratio as a fraction of free cash flow. The results are shown below.

Year Free Cash Flow (Mil $) Float (Mil Shares) Payout Ratio
2002 $6,063 2,810 37.08%
2003 $7,218 2,803 34.17%
2004 $7,338 2,790 37.26%
2005 $6,541 2,726 45.43%
2006 $8,708 3,286 45.66%
2007 $10,490 3,399 44.07%
2008 $12,768 3,317 40.27%
2009 $11,681 3,154 46.44%
2010 $13,005 3,099 44.93%
2011 $9,925 3,002 62.21%
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The payout ratio has historically been around 40% with the exception of fiscal 2011.

Valuation

I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 8.7% in 2013, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.

Year Dividend Growth Rate
2012 7.5%*
2013 8.7%
2014 8.4%
2015 8.1%
2016 7.8%
2017 7.5%
2018 7.2%
2019 6.9%
2020 6.6%
2021 6.3%
2022 6.0%
2023 5.7%
2024 5.4%
2025 5.1%
2026 4.8%
2027 4.5%
2028 4.2%
2029 3.9%
2030 3.6%
2031 3.3%
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* 2012 quarterly dividend already announced

For reference, the average analyst estimate for earnings growth for the next five years is 8.67%. Using the above parameters, I arrive at a fair value estimate of $66.86, which is very close to the current market price of $66.78.

Conclusion

Procter & Gamble appears to be fairly valued from a dividend perspective, trading very close to my estimated fair value. One point of concern is the high payout ratio in 2011, so there is some uncertainty in the dividend growth going forward. But given Procter & Gamble's consistency in the past, it looks like a solid dividend stock going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.