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Friday, November 8, 2013

Stock Analysis: PG

Headquartered in Cincinnati, Ohio, The Procter & Gamble Company (PG) is focused on providing branded consumer packaged goods in more than 180 countries. PG was incorporated in Ohio in 1905, having been built from a business founded in 1837 by William Procter and James Gamble. PG currently competes in 37 product categories and has five reportable segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care.

PG is a Dividend Champion with a long track record of 56 consecutive years of dividend increases. It pays quarterly dividends of $0.60 per share in the months of February, May, August, and November. At the current price of $82.32, PG yields 2.92%.

PG has outperformed the S&P 500 over the past 10 years, returning 117% compared with 68% for the S&P 500. PG dividend growth rate over this period was 10.8%.

Fair value estimates for PG vary from $46.14 (Graham Number method) to $87.00 (MorningStar). PG trades at a premium of about 2.5% to my fair value estimate of $79.20.

PG passes the following of my selection criteria:
  • Sum of dividend yield (2.92%) and 5-yr dividend CAGR (10.21%) is 13.13% (Chowder Dividend Rule)
  • EPS% Payout ratio is 62.33% (below 65%)
  • Debt to Equity ratio is 47.00% (below 50%)
  • 7-year weighted average dividend growth rate is 9.88% (at least 7%)
  • 5-yr total payback percentage is 17.77% (above 16%)
PG fails the following of my selection criteria:
  • Trailing twelve month (TTM) P/E ratio is 21.02 and forward P/E ratio is 17.39 (not below 16%)

PG earns 6 stars: (*******)

Other ratings for PG

 S&P Capital IQ Stock Report   (*****) Buy 
 Thomson Reuters StockReport+    6 Neutral 
 MorningStar Rating  (*****)
 The Motley Fool's CAPS Rating  (*****)
 Zacks Rating  3 Hold

Concluding Remarks

There are several reasons to buy PG. It has a long streak of dividend increases and pays a reasonable dividend of $2.41 a year. I don't own any stocks in the Consumer Staples sector yet, so buying PG would improve DivGro's diversification.

PG's products enjoy strong brand recognition and are sold in 180 countries. No fewer than 25 of its leadership brands are Billion Dollar brands that each generate at least $1 billion in sales annually. PG generates strong free cash flow every year. In fiscal 2013, it generated $10.9 billion in free cash flow, which allows management to invest in product innovations, acquisitions and brand development in addition to paying dividends and repurchasing shares. PG's 7% dividend hike in April was the 57th consecutive year of a dividend hike. It also repurchased shares worth $6 billion in fiscal 2013.

High commodity costs are hurting PG's margins despite its revenue growth. Also, despite signs of modest economic recovery, consumers are still being confronted with high gasoline prices and payroll tax increases. These factors inhibit discretionary spending. With about 60% of PG's business being generated outside the North America, foreign exchange volatility could also hurt PG's business.

I'd like to see PG come down to $75 before I would consider buying shares for DivGro. At $75 per share, the initial yield would be 3.21%. Purchasing 33 shares at $75 per share would generate $79.40 in annual dividend income.

Full Disclosure: I don't own any shares in PG and I'm not planning on buying any shares soon.

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