Proctor & Gamble: Consistency Is Crucial to Success

This article originally appeared on The DIV-Net July 9, 2008

Last Wednesday I wrote about my dividend growth philosophy. This is my investing plan that I employ through good times and bad, no matter what the market throws at me. The first factor in the last point within my investment philosophy, and a factor that I consider crucial when selecting and analyzing investments, is consistency.

Consistency to me means steady growth of sales, earnings, and dividends over many years. It also means maintaining market share, return on equity, and a solid balance sheet as well as a stable, positive corporate culture and direction. When selecting companies (stocks) to evaluate for my watch list, which I will later use to monitor price action and select an entry point, consistency is critical.

In order to be successful long term using a dividend growth investment strategy, I believe that selecting consistency is necessary. The reason for this is that for a corporation to be a long-term raiser of dividends they need to be a long-term raiser of earnings. Stable, boring companies that raise their earnings and therefore their dividends year in and year out are what I am after. I am not after companies that double their earnings one year, and then go on to earn 30% less the next year.

Since a dividend is actually money that is paid out in cash, some reliability and consistency must be built into a company in order for that company to raise dividends every year. The company must have the wherewithal to know that they'll be able to come up with ever-increasing amounts of cash to pay me each year. Generally, cyclical, fly-by-night, sporadically growing, or companies struggling with business model issues do not have this luxury.

Companies that raise their dividends every year have made a conscious decision to make consistency a priority. The reason for this is that they know they'll need to come up with an every increasing pile of cash to use for dividend payments each year, so in most years they must earn a little bit more than they earned in the previous year. Their culture as a company, their relationship with investors, and their long-term performance and investor return metrics all absolutely depend on them becoming consistent.

One company that fits the consistency bill to a tee is consumer products giant Procter & Gamble (PG). Let's look at how PG gets it done:

• Earnings per Share: PG has increased EPS in seven of the last nine years.
• Sales: PG has increased sales in eight of the last nine years.
• Dividends: PG has increased dividends in nine of the last nine years (this track record goes back very far).
• Return on Equity: PG's return on equity as been above 15% in eight of the last nine years.

Disclosure: None

Comments

[pennystocks2008]

If you want us to take your wish-wash seriously, find out first whether it is "Proctor & Gamble" or "Procter & Gamble".

[deaverb]

P & G, and the former General Foods where I worked many moons ago, placed too much emphasis on "controlled growth" to satisfy writers such as this one. Letting the chips fall where they may would have led to more aggressive "ups" with less bounce down. P & G would have been able to hold on to lesser brands, many of whom make outsized "real" profits (virtually no mgt attention; they absorb overhead to please the accountants, but they really "overabsorb"... A little more leeway could really make the P & G's bounce--especially if their CEOs leveled with the street. If the street "knew," that would be over 50% of the battle. But, part of the problem, is the boards usually hire "steady eddies" versus go get 'em Steve Jobs types.

[User 229353]

I apologize in advance for my long note. I'm trying to sort thru what you're talking about & where you may have got your facts from as they may apply to P&G. G. Foods may benefit from your advice but as large shareholder and former employee of P&G I'm of the opinion mgt. is handling brand strategy fairly well. Leaving behind the older less profitable brands for those that have a higher return on investment is a practiced & true strategy @ P&G. It's looked at as managing your business. As all brands - no matter how large or small require attention when you're manufacturing & shipping them globally - which is the goal. These older brands have for the most part been ones that while adding to the bottom line are often most greatly affected by rapidly changing commodity prices, didn't fit the brand mix mgt. felt was right for the global strategy, required increased attention at store level or had the greatest shipping / manufacturing costs. Recognizable brands shed by P&G in recent yrs. include Duncan Hines, Hawaiian Punch, Crisco, Jif, Crush Soda, Coast, Lestoil, Lava, Spic & Span, Sunny Delight, Comet, Cinch, Clearasil, Citrus Hill & White Cloud to name a few. With the Folgers Brand soon to be added to the list ( P&G will continue have a large say in it's future business). These have been replaced with brands such as Gillette, Iams, Wella, Duracell & Braun, Clairol, Vicks, & Thermacare. The first five of which add (1) billion $ annually to the companies sales.

In response to your comment on a large consumer companies ability to control the growth of it's business it's really a necessity if you want to remain in business. This control allows the companies mgt. to keep a tight hand when it comes to production, inventories, shipping needs & it's employees. All of which drive up the cost of goods & reduce your ROI. This also often gives the company an advantage when locking in the price of materials forecast to be needed in the future & where they'll be needed. It really doesn't make any sense to "let chips fall where they may" on any level of business.

Last but not least I'm sure that if you have info to share as to how any directors might be misleading wall street or investors where it concerns these or any companies I'm sure everyone involved would love to hear any facts you might have on that subject.