Consumer Names Offer More Than Just Dividends

| About: The Procter (PG)
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If I asked you what came to mind when you heard the phrase "consumer names," like Procter & Gamble (NYSE:PG), what would be your first response? Good dividend? Sure, that works. Brand names? Long history? Those work too.

But the last two, brand name and long history? They don't mean much in the stock market sometimes. Just ask shareholders of Eastman Kodak (EK). How have they felt lately? Not good. The company, which has been around since 1880, is near bankruptcy due to its failing financial condition. Just because you've been around for a while doesn't mean your stock can't get wiped out.

Why do I tell this story? Because not all consumer names are created equal, and not are all alike. Yes, consumer names offer decent dividends, and those dividends have been growing year over year. But there's more to this story, and I'm here to tell you why. My focus here is based off the above mentioned name, Procter & Gamble.

To Start: The Dividend

Procter & Gamble pays a 52.5 cent quarterly dividend, which equals $2.10 on a yearly basis. That equates to a current yield of 3.19%. In fact, that's 28 basis points more than 30 year Treasury bonds at the moment. In fact, in 2011, the company paid out $2.06 in dividends, which was 85 cents more a share than it did in 2006. That equates to around 11% growth per year. The dividend is increasing at a nice rate, but that's just the beginning of this story.

It's not just the dividend that's growing:

Not all dividends are created equal. Just because a dividend is growing doesn't mean that a stock is necessarily yielding more. Consider this example, a $100 stock that pays $2 in dividends annually. Over the next five years, it increases the dividend by 3%, but the stock increases by 5%. At the end of five years, you are getting nearly $2.32 a share, but thanks to the increased stock price, you're only getting a yield of 1.82%.

Why do I bring this up? Well, let's go back to Procter & Gamble. The stock has increased its dividend at a nice clip recently, but the yield has also increased. Look at the following table. The dividend column shows the dividends paid in that year. The average column shows the average non-adjusted closing price of the stock for that year.

PG Dividend Average Yield
2006 $1.21 $59.52 2.03%
2007 $1.36 $65.96 2.06%
2008 $1.55 $66.14 2.34%
2009 $1.72 $54.47 3.16%
2010 $1.89 $62.13 3.04%
2011 $2.06 $63.73 3.23%

As you can see, it's not just the dividend that's increasing. Other than just a small decrease in 2011 thanks to the giant snapback rally in the stock market, the yield is increasing each year as well. As a matter of fact, the compound annual growth rate on the yield is 9.7%. This stock was yielding just over 2% a couple of years ago, and now you're getting more than 50% more. Increasing dividends are good, but we also like increasing yields, don't we? Now of course, this means the stock isn't rising as fast as the dividend, but if you think that this name is going to rise like 30% a year, you're sadly mistaken.

Stock Buybacks:

When you think of a stock that's considered a "value" name, do you just think of it paying a dividend? Hopefully not. These consumer names also are favorites because their excellent financial position and ability to generate quality cash flows allows them to buy back large amounts of their own stock. In their last three fiscal years (recent one ending last June), Procter & Gamble bought back a lot of stock. In terms of net cash flow, they spent almost $17 billion. Why do I say net cash flow? Well, generally, companies "issue" stock during the year for things like executive compensation and bonuses. These are usually little amounts. Then you add in how much stock they bought back. So in terms of net cash flows, they've bought back almost $17 billion, meaning they've actually bought back more. Other related names, like Johnson & Johnson (NYSE:JNJ) and Kimberly Clark (NYSE:KMB) are also buying back stock, just not as much as P&G.

Long-term performance:

Consumer names are known for their price stability, meaning they won't make you a millionare overnight. However, if you invest in these names over time, and you reinvest your dividends, you will do quite well. Here's how the three names I've mentioned have done over some recent time periods. The following returns are adjusted for any possible dividends and splits, and includes the dividend adjusted S&P 500 ETF (NYSEARCA:SPY) as well.

Performance PG JNJ KMB SPY
1-Year 3.69% 8.14% 19.10% 1.74%
3-Year 24.88% 24.88% 60.84% 61.98%
5-Year 16.17% 14.59% 28.17% -0.49%
7-Year 40.74% 27.11% 45.90% 24.94%
10-Year 113.12% 42.33% 79.15% 36.09%

Now, we all known that these names won't beat the market when the market is rising quickly, and that is clearly evident. We've seen a huge rally in the markets since they bottomed a few years ago, and it is expected that names like P&G won't do as well. However, if you look at the longer term returns, you'll see that these three names have done much better than the markets.

A little growth:

Don't fall into the trap of thinking that these names don't offer price appreciation. They do, and it's not just from stock buybacks. These companies are growing revenues in the low to mid single digits each year, and earnings per share generally will rise faster due to share buybacks eliminating large numbers of outstanding shares.


Don't just say it's all about the dividend. It's not! These names offer more than just a dividend, and I've clearly shown you why. I focused on Procter & Gamble not just because it's the largest, but because it has the best long term returns and is buying back the most shares. The company is doing well, and these are names that will not disappear anytime soon. You can continue to buy these names for their dividend, but realize, you are getting more than just that.

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