Comfort Level with Procter & Gamble on the Rise

Linked here is a PDF copy of my analysis of Procter & Gamble Co. (PG) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.

Fair Value: I consider four calculations of fair value; see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price

2. 20-Year DCF Price

3. Avg. P/E Price

4. Graham Number

PG is trading at a discount to 1. and 3. above. If I exclude the high and low valuation, and average the remaining two valuations, PG is trading at a 6.2% discount. A star is added since PG is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors; see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%

2. Dividend Growth Rate

3. Years of Div. Growth

4. 1-Yr. > 5-Yr Growth and

5. Payout 15% of avg.

PG earned two stars in this section for 3. and 4. above. It has paid a cash dividend to shareholders every year since 1891 and has increased its quarterly cash dividend payments for 52 consecutive years. The "1-Yr. > 5-Yr Growth" metric indicates that PG's dividend growth has experienced acceleration.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section; see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.

2. Years to >MMA

Unfortunately, PG earned no stars in this section. The NPV MMA Diff of $2,265 is below the level I like to see for a blue-chip company. The 11 years needed for the dividend income to equal a MMA paying the long-term average rate of 4.61% is one more than the 10 years maximum I like to see.

Other: PG is a well-managed company that produces consumer staples. PG's ability to consistently grow its dividend over different economic cycles has made it a staple in most dividend investors' portfolios. The risk of PG experiencing a significant downturn is less than most companies since demand for household and personal care products is generally stable and not affected by changes in the economy or geopolitical factors.

Conclusion: PG earned a star in the Fair Value section, earned two stars in the Dividend Analytical Data section and earned no stars in the Dividend Income vs. MMA section for a net total of 3 stars. This rates PG as a 3 Star-Hold.

PG is one of those Blue-Chip stocks that I would love to have in my portfolio. It has made significant strides since I reviewed it back in February. At that time it rated as a 0 Star-Avoid stock. What's changed? At that time it was selling for $66.21 vs. $63.13 today; it has increased its dividend, resulting in a current yield of 2.47% now vs 2.12% in February. The NPV MMA Diff is now $2,265 vs a negative $900 in February.

Am I ready to buy? Not quite, but it is getting very close. Using my [D4L-PreScreen.xls] model, I determined that a price of $58.11 would lower the "Years to >MMA" to 10 and increase NPV of MMA Differential to over $3,000. I would be very comfortable initiating a position between $58 and $60.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not own shares of PG (0.0% of my Income Portfolio).

What are your thoughts on PG?

Comments

[Afamiii]

I've owned P&G since 1993 when I bought at 12, and I haven't looked back. It has delivered 11% compounded average appreciation + a nice dividend.

At the time I bought it I knew nothing about stocks, DCF, EV, EBITDA and certainly didn't value it. At the time it was 100% of my portfolio (I was a young man and didn't really understand the types of risks I should be taking.)

Though it's now less than 2% of my portfolio (and to be honest it doesn't offer the type of performance that I look for now) it's better than money in the bank and I expect it will be one of those that my children will inherit. smartinvestorafrica.co...

[Chandler Lutz]

P&G is great company that will generate cash when the market goes up down or sideways. Currently the company is trading at the low end of their 5 year valuation. It is a stalwart with a market cap in excess of 190 billion so don't expect this company to make a huge run any time soon, but if you want something that is relatively stable P&G is never a bad call...

[braddunc]

You assert that: "PG is a well-managed company that produces consumer staples." You offer no supporting information, and I would argue that any company that sells off its most profitable cash-generation brands, i.e. Crisco, Jif, and Folgers instead of utilizing capital to improve and build upon them is just another example of all too common "corporate adventurism.", NOT managerial expertise. The abandonment of these high-profile and successful franchises leaves only three recognizable cash cows upon which to base dependable dividend growth, Crest, Charmin and Tide. After the presumable divestiture of these superb and popular products, it will inevitablly lead P & G to the same level of destitution as, for example, Bristol Myers after it divested itself of its well-known moneymakers, Excedrin, Ipana etc. that has plagued that company for the past 10 to 15 years.
The Smucker family might not have the "benefit" of grossly overpaid management but by scooping up P &G's discarded name brand building blocks, it sure gives them a leg up in constructing a solid and expanding enterprise.

[User 104726]

While not a sophisticated stock analyst, I do have extensive experience with P&G. I've worked for the company for 30+ years and have WAY too much exposure through my profit sharing account. I have not worked directly with Jif or Folgers and have not worked with Criso since 1982, so the information below is largely from the internet and the old timers sitting at the break table.

As for the e-mail above regarding divesting brands, consider this. Crisco was a very mature brand with very little growth. Today's consumer does not bake nearly as much as they did in the 50's & 60's when Crisco became recognized as a leading brand. Jif is also in the high fat stable or declining market category. The company is very clearly on a push to move out brands that are not delivering double digit total shareholder return. As for coffee, when commodity pricing was lower, it was a very profitable brand. However, there are many risks to coffee. Virtually all production comes from South America, not the most stable group of countries. The only Folgers production facilities are in New Orleans and Sherman Tx. As we've seen in recent years, both are high risk areas for hurricanes. I think the sale of Folgers was a risk reduction move.

I do know that AG Lafley is serious about keeping large brands that have good cash flow and selling brands that are not growing or do not meet his economic criteria. That frees up resources and cash to invest in a more promising venture.

As for P&G slipping into destitution due to the loss of Crisco, Jif, and Folgers, I would recommend that your go to PG.com and look at the current product line-up. I believe you will see a very familiar brand line-up, with many that have much higher margins than food products. I would also bet that P&G is a very large shareholder of Smuckers stock. While they have not truly had a complete break with these food brands, their equity has been converted in a form that has much more liquidity.

Yes P&G stock is lower than recent highs. I think that is largely due to the economy (P&G products are generally on the high end ) and energy prices (takes a lot of energy to dry paper). While this might not be the bottom, I would not hesitate to build a position at these prices if you are investing for 5+ years.

Beauble