Reader Stock Pick: Procter and Gamble Company (NYSE:PG)
12 June 2007An anonymous Dividends Matter reader requested that we have a look at an old stalwart of the dividend stock world - Procter & Gamble Company. This company has been paying dividends continuously since 1891! Let’s check it out.
Company Profile:
From Yahoo Finance:
The Procter & Gamble Company and its subsidiaries engage in the manufacture and marketing of various consumer products worldwide. It operates in seven segments: Beauty; Health Care; Fabric Care and Home Care; Pet Health, Snacks and Coffee; Baby Care and Family Care; Blades and Razors; and Duracell and Braun.
P&G has many well known brands such as Duracell, Braun, Head & Shoulders, Crest, Tide, and Pampers. The list goes on and on and on. They definitely have brand recognition wrapped up!
P&G is a large cap stock with a market capitalization of $198.54B.
Company Fundamentals:
Let’s start off with our faithful Return on Equity (ROE). Let’s just say that things have been stellar for 9 of the last 10 years! The 10 year average is 30.75% and the 5 year average is 30.89%. However, there is a blemish on the management’s stellar performance: 2006. Return on equity was a very pedestrian 13.63%. Out of all the years for that low ROE to show up, it is always worse when it is the last year.
Looking at the equity growth rate, we see some rather interesting growth patterns. Five of the years show very little if no growth (between negative 1.62% and 4.18%). Three of the years show decent growth rates ranging from 9% to 18%. And last year (when management produced that average looking ROE), the equity growth rate was an astonishing 182.92%! I had to check a couple of sources to make sure that the value was right! The book value per share jumped from $6.98 in 2005 to $19.74 in 2006. Of course, that monster number in 2006 skews the 10 year and 5 year average making them meaningless.
The earnings per share growth rate has been fairly consistent in the 13% to 15% range. However, there were a few lean years with growth rates of 3.51%, 5.76% and 1.13%. They have always managed to recover from these low growth rates in future years. Even with those lean years, compounded rate of return over 9 years was still a healthy 10.46%.
Sales growth rate has been fairly steady over the last 10 years. The first 7 years show very little growth in sales. However, there has been a nice increase in the last 3 years with sales growth rates of 18.52%, 10.38% and 20.23%.
Dividend Fundamentals:
Current dividend yield is sitting at 2.22%. This is better than the dividend yield on the S&P 500 and about the same as the Dow Jones Industrial Average dividend yield.
Dividend growth rates have been very steady over the last 10 years at just over 10%. This company definitely has a culture of increasing their dividends.
Cash flow growth rate has also been fairly consistent with a compounded average of almost 8% since 1998. From this, we would presume that the dividend payout ratio has probably remained fairly consistent over the period and only increased slightly since dividend growth has been greater than the cash flow growth rate.
Historical Dividend Yield:
Sure enough, the dividend payout ratio has been moving in a very small range between 38% and 45%. The dividend payout ratio currently sits at 42.75%. Some dividend payers (see my analysis of KO) have been increasing their dividends, but at the expense of their payout ratios. Luckily, P&G has not had to resort to that tactic to keep their dividends growing.
Looking at the data over the last 10 years, the average high dividend yield has actually been quite consistent. The 10 year average high dividend yield is 2.16%. So this is a fair number to use as the high dividend yield that an investor could expect to purchase P&G shares for.
With investors demanding 2.16% dividend yields, a price of $64.87 would be an attractive price for P&G. At close of Friday, P&G stock was selling at $63.07. That means the stock is currently selling at a 2.78% discount.
Check my calculations for yourself.
Conclusion:
Procter and Gamble Company has definitely been a steady, dividend paying performer. I am a little concerned with the return on equity and earnings per share growth rate produced in 2006. However, the equity growth rate of 182% and the solid sales growth rates in recent years give me hope that 2006 may have been a smudge on a fantastic record so far.
Disclosure:
I do not own any shares in Procter and Gamble. But that will likely change in the near future!
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on June 14th, 2007 at 1:07 pm
Hi there,
the reason why the ROE fell in 2006 is the take over of Gillette - hence also the reason for the much higher increase in book value.
Hopefully as they digest the Gillette takeover return on equity should gradually get back to previous levels.