Procter & Gamble: Dividend Stock Analysis

| About: The Procter (PG)

After publishing Clorox (NYSE:CLX) & Colgate-Palmolive (NYSE:CL) analyses, I'm going to take a look at another great dividend stock: Procter & Gamble (NYSE:PG).

Procter & Gamble (PG) Business Description:

Founded more than 100 years ago (1905), Procter & Gamble is one of the largest and best known companies in the world. PG operates in over 180 countries and they have divided their widely diversified operations into 5 divisions:

  1. Beauty (Head & Shoulders, Olay, Dolce & Gabbana, Gucci & Hugo Boss fragrance)
  2. Grooming (Braun, Gillette)
  3. Health Care (Always, Crest, Oral-B, Vicks)
  4. Fabric Care & Home Care (Dawn, Duracell, Febreze, Gain, Iams, Tide)
  5. Baby Care & Family Care (Bounty, Charmin, Pampers)

Click to enlargePG product diversificationClick to enlarge

As you can see, one of PG's huge strengths is the individual star power commanded by many of its brands. Without knowing, everybody has at least one PG product in their household. It claims to have 24 individual brands selling over 1 billion each. A total of 50 brands generate 90% of their sales & profits. If you are looking for a diversified company, I think you will find a good one in Procter & Gamble. The beauty of most of its products is also that we need them regardless if we make a lot of money or not (who would skip on toilet paper, anyways?).

P&G operates in several countries and has a great mix of developed (65%) and developing markets (35%). While it is well established in North America where its main market is, it is also making an important part of their profits overseas as shown in this graphic:

Click to enlarge

As is the case with Clorox and Colgate-Palmolive, Procter & Gamble puts a lot of emphasis on sustainability in its socially responsible reports. I found it interesting that it has been tracking its progress since 2002. It now has 10 years under its belt to prove that it is a sustainable company. It has cut roughly 50% and more of its energy, CO2 emission, water usage and waste since 2002. Since the company is selling more than it used to be back in 2002, we can say that it's quite a feat (or that it used to waste a lot of water back then). It is part of several socially responsible indexes (FTSE4Good, DJSI and the top 100 world most sustainable company). PG also focuses a lot on sustainability product innovation. I think it understood that the future of a company like its own is directly linked to the creation of more sustainable & green products. The population is consuming a lot, but natural resources are limited, it's about time that we understand this concept.

PG Stock Graph

Click to enlargePG Stock GraphClick to enlarge

PG Dividend Growth Graph

Click to enlargePG DIVIDEND GROWTHClick to enlarge

PG, along with many other consumer product businesses, has focused on dividend growth over the past five years. It shows an important and steady dividend increase over this period. However, I have a few concerns with regards to the sustainability of such high dividend growth for the years to come. You'll understand why after looking at the financial ratios. However, the company shows 56 consecutive years with a dividend increase. I guess we can call this stock a Dividend Growth Stock.

Procter & Gamble Ratios and Financial Info:



Name Procter & Gamble Co/The
Dividend Metrics
Current Dividend Yield 3.29
5 year Dividend Growth 10.49
1 year Dividend Growth 7.97
Company Metrics
Sales Growth (1 year) 1.36
Sales Growth (5 year) 1.35
EPS growth (5 year) 15.37
P/E ratio 18.37
P/E Next Year 16.23
Margins growth -1.06
Payout ratio 66.06
Return on Equity 16.32
Debt to Capital Ratio 0.16
Click to enlarge

Look at the following two graphs and tell me what is wrong with P&G:

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PG NET SALESClick to enlarge

If the earnings per share are quite stable and then drop, while the net sales are on an uptrend from 2009 to 2012, what happens? Margins are under pressure. Procter & Gamble is definitely under profitability pressure. In order to find out more info, I've gone through the financial statements to see what went wrong in 2012. The company always find a positive way to present the EPS and talked about core earnings per share being $3.85 (including $0.54/share of discontinued operations) and relate the drop in earnings due to raw material costs, tax rates and increased investment in developed markets.

Going deeper into the financial statements, I've discovered more info. The EPS decreased due to:

PG EPS EXPLANATIONClick to enlarge

In order words; impairments + margin pressure partially saved by the sale of snack business (Pringles) (note to myself; P&G won't be making those delicious chips and making profit from it next year).

PG Stock Technical Analysis

Click to enlargePG technical analysisClick to enlarge

PG is currently trading on a strong uptrend. It might be a good time to add this stock.

Procter & Gamble Upcoming opportunities and dangers:

You can tell that P&G knows that its margins are under pressure as it announced a $10 Billion productivity plan back in February. It will focus on innovation and productivity in the upcoming years. While this sounds like a good plan, it may also become a big hole where it shovels billions of dollars. You always have to be cautious with such "productivity" improvements.

Going back to this margin pressure issue, it seems that the impairment charges along with the restructuration (for more productivity) are one time costs and P&G expects EPS to go higher than $4 in 2013. I was a bit worried when I saw the EPS going down but now that I've found an explanation, it seems that P&G doesn't have much for me to worry about.

Sure competition will be there, but Procter & Gamble has the biggest budget in R&D and improvement amongst its competitors. This should keep its leader's position seat warm and fuzzy for the future. On the other hand, a relatively high P/E ratio is a sign that PG is not a deal right now, but rather a good dividend growth stock to hold in your portfolio.

Final Thoughts on Procter & Gamble

I like what I see in P&G, but I'm not too excited either. In fact, the company has been doing well over the past years, but it hasn't been doing amazing. P&G seems a logical choice for anyone who wants to add some safe and steady dividend growth stock to his portfolio. At this stage, there is more to expect from the dividend than from the actual growth of the company.

Disclaimer: I do not hold PG in my portfolio.