This article will discuss the current opportunity provided by Procter & Gamble (PG). PG has sold off rather substantially in the last two days due to its announcement of lower quarterly earnings. I will cite three reasons why the selloff may provide an attractive entry point into the equity for the long term dividend investor.
P&G at a Glance
2011
Reportable Segment | Categories | Billion-Dollar Brands | Net Sales |
Beauty (24% of FY 2011 net sales) | Antiperspirant and Deodorant, Cosmetics, Hair Care, Hair Color, Hair Styling, Personal Cleansing, Prestige Products, Salon Professional, Skin Care | Head & Shoulders, Olay, Pantene, SK-II, Wella | $19.9 |
Grooming (10% of FY 2011 net sales) | Blades and Razors, Electronic Hair Removal Devices, Shave Products, Home Small Appliances | Braun, Fusion, Gillette, Mach3 | $8.3 |
Health Care (15% of FY 2011 net sales) | Feminine Care, Gastrointestinal, Incontinence, Rapid Diagnostics, Respiratory, Toothbrush, Toothpaste, Water Filtration, Other Oral Care | Always, Crest, Oral-B, Vicks | $12.0 |
Fabric Care and Home Care (32% of FY 2011 net sales) | Laundry Additives, Air Care, Batteries, Dish Care, Fabric Enhancers, Laundry Detergents, Surface Care | Ace, Ariel, Dawn, Downy, Duracell, Febreze, Gain, Iams, Tide | $26.5 |
Baby Care and Family Care (19% of FY 2011 net sales) | Baby Wipes, Diapers, Paper Towels, Tissues, Toilet Paper | Bounty, Charmin, Pampers | $15.6 |
PG is a dominant player in the consumer staples market. As we can see from the chart above, PG has a stable of dominant well established brands. The brands are durable and difficult to replicate giving PG a wide moat which is used to charge more than store brands for similar goods.
By competing in the consumer staples market PG has a highly predictive business. That's not to say that there won't be issues such as higher commodity costs that negatively impacted earnings this quarter. The business has consistent and predictable sales which has been a favored criterion of legendary investor Warren Buffet.
The second reason for a potential investment in PG revolves around its consistent and growing dividend payment. PG has increased its dividend for 55 straight years which is quite impressive. At a current dividend rate of $0.562 per share PG is paying $2.248 annually for a yield of 3.76% based on a closing price of $59.75. An investor purchasing shares in PG would be rewarded with a yield in a very stable company that is more than double what a 10 year US treasury bond is currently paying.
The third reason for an investment in PG revolves around their credit rating. PG has an outstanding credit rating that in my opinion should be used to make some strategic acquisitions to bolster growth. PG debt is maturing over the course of the next five years and has no debt maturities with a 6 or more year time horizon. With interest rates at extremely low levels, I believe it would propel them to future growth, if they would sell some long dated corporate bonds and use the proceeds to fund an acquisition.
Chart courtesy of Big Charts.com
In summary, PG is a dominant global consumer staples company that offers a stable growing yearly dividend. As we can see from the chart above except for the depths of the 2009 global stock selloff $55 per share has provided an excellent entry point. At $55 per share PG will be paying a 4% dividend which will compensate an investor quite nicely while waiting for it to trade up to the high 60's again. Thank you for reading and I look forward to your comments.
Additional disclosure: I am looking to initiate a position in PG at $55 a share.
