Updated March 18, 2021 by Bob Ciura
The Dividend Aristocrats are widely known as the best dividend growth stocks to buy and hold for the long term. These companies have made strong profits year after year even in recessions and have demonstrated the ability to steadily increase their profits over many years.
The Dividend Aristocrats are a group of companies in the S&P 500 Index with more than 25 consecutive years of dividend increases. Of the ~ 505 stocks that make up the S&P 500 Index, only 65 currently qualify as Dividend Aristocrats.
You can download an Excel spreadsheet with the full list of Dividend Aristocrats by clicking the link below:
Once a year we review each of the Dividend Aristocrats. Next in line is Procter & Gamble (PG), a giant in consumer goods. P&G has paid dividends for 130 years and has increased its dividend for an astonishing 64 consecutive years.
In addition to being a dividend aristocrat, the company is also a dividend king. The Dividend Kings have increased their dividends for over 50 years in a row. You can see all of the dividend kings here.
Procter & Gamble is one of the most famous dividend stocks, largely due to its extremely long dividend history and well-known brands. P&G recently completed a major overhaul of its product portfolio, including a significant divestment of brands that it no longer deems necessary. It is now more focused and efficient and has new growth potential.
This article discusses P & G’s recent portfolio transformation, future growth prospects, and stock valuation.
Procter & Gamble is a consumer goods giant that sells its products in more than 180 countries and has annual sales of over $ 70 billion. Some of its core brands are Gillette, Tide, Charmin, Crest, Pampers, Febreze, Head & Shoulders, Bounty, Oral-B and many more. The company trades with a market capitalization of approximately $ 318 billion. This qualifies P&G as a mega-cap share.
During the massive restructuring of P & G’s portfolio over the past few years, the company has sold dozens of its consumer brands. Asset sales include Duracell battery brand to Berkshire Hathaway (BRK-A) (BRK-B) for $ 4.7 billion and a collection of 43 beauty brands to Coty (COTY) for $ 12.5 billion.
Today, P&G has reduced itself from 170 brands to just 65.
Source: Investor Presentation
The benefit of the reorganization is that P&G held onto its key consumer brands such as Tide, Charmin, Pampers, Gillette and Crest, shedding low-margin companies with limited growth potential. The effect of the transformation is that P&G is now a nimbler, more flexible organization with improved growth prospects.
P & G’s scaled-down portfolio has made the company more efficient, with lower costs and higher margins. In addition, P&G received billions of dollars from its various asset sales, a large portion of which was used to buy back shares. These share buybacks have improved P & G’s earnings growth per share.
On January 20, 2021, Procter & Gamble released the results of the second quarter of the fiscal year 2021 for the period ended December 31, 2020 (Procter & Gamble’s fiscal year ends June 30). For the quarter, the company had revenue of $ 19.7 billion, an 8.3% year-over-year increase. That result was led by overall growth. The company’s five reporting segments – beauty, personal care, healthcare, fabric and home care, and baby, womens and family care – grew 6%, 5%, 9%, 12% and 6%, respectively.
Net income was $ 3.854 billion, or $ 1.47 per share, compared to $ 3.717 billion, or $ 1.41 per share, for the second quarter of 2020. Adjusted, core earnings per share increased 15.5% year over year to 1, 64 USD. Procter & Gamble also increased its fiscal 2021 revenue estimate from previous forecasts of 3% to 4% to revised forecasts of 5% to 6% growth. In addition, the company expects core earnings per share to grow 8% to 10% from the prior year figure of $ 5.12 per share.
Margin expansion is an integral part of P & G’s earnings growth strategy. P & G’s cost-cutting efforts have brought operating margins and after-tax profit margins to the top of the peer group.
Another growth catalyst for P&G are acquisitions such as the acquisition of the global consumer health business of the German-based pharmaceutical giant Merck, valued at US $ 4.2 billion. The acquisition comprised 10 core brands for vitamins, nutritional supplements and other over-the-counter products.
According to Merck, the global OTC market is expected to grow by 5% annually through 2025, which explains why P&G is looking to invest more in this area.
Proctor & Gamble has had a tough time growing for most of the last decade, but the tide has turned in the company’s favor since the turnaround completed. For the next five years we forecast an annual growth in earnings per share of 4%.
Competitive advantage and recession performance
P&G has several competitive advantages. The first is the strong brand portfolio. P&G has several brands that have annual sales of $ 1 billion or more. The 65 remaining core brands hold leadership positions in their respective categories. These products are associated with high quality and consumers pay a premium for them.
To maintain its competitive position, the company invests heavily in advertising, which it can do thanks to its financial strength. The company invests billions more in research and development every year. This investment is a competitive advantage for P&G; R&D encourages product innovation, while advertising helps market new products and gain shares.
P & G’s competitive advantages enable the company to remain profitable even in times of recession. The result held up very well during the Great Recession:
- 2007 earnings per share of $ 3.04
- 2008 earnings per share of $ 3.64 (up 19.7%)
- 2009 earnings per share of $ 3.58 (-1.6% decrease)
- 2010 earnings per share of $ 3.53, down -1.4%
As you can see, P&G had a very strong year in 2008 with earnings growth of nearly 20%. The result fell only slightly over the next two years.
This was a very strong performance in one of the worst economic downturns in decades. The company continued to perform well over the past year as the coronavirus pandemic plunged the U.S. economy into recession. P & G posted stable profits again and increased the dividend.
P&G has a recession-resistant business model. Everyone needs paper towels, toothpaste, razors and other P&G products, regardless of the economic climate.
Valuation and expected return
Based on expected earnings per share of $ 5.60 for fiscal 2021 and a current share price of $ 129, P&G is currently trading at a price-to-earnings ratio of 23.
For the past decade, stocks have traded at an average valuation roughly equal to 20 times earnings. As such, stocks appear to be more than fully valued. The company’s improved growth prospects appear to be factored in, and a few more. If P & G’s valuation were to go back to 20x earnings, which is our fair value estimate, future shareholder returns would decrease -2.8% annually for the next 5 years.
Earnings growth and dividends will help offset the effects of a shrinking price / earnings ratio. For example, we expect P&G to achieve 4% annual earnings growth through 2026, and the stock has a current dividend yield of 2.4%.
When you add it all up, however, there remains some uninspiring total return potential in the low single digits on an annualized basis. The total return is expected to be 3.6% per annum as the impact of a declining valuation multiple effectively offsets the company’s expected EPS growth. Granted, this estimate could be overly conservative if stocks continued to trade at an elevated valuation or if growth spelled out faster. Of course, these two points are far from certain.
The current dividend payout is well covered by earnings and offers room for growth. Based on the expected result for the 2020 financial year, P & G has a payout ratio of almost 60%. This leaves enough cushion for future dividend hikes in the low to mid single digits each year.
Source: Investor Presentation
Investors should expect P&G to keep increasing its dividend every year for many years to come. It has the brand strength, competitive advantage, and profitability to sustain its steady and annual dividend increases over the long term.
P&G has many strong qualities that make it a proven dividend growth company. But legendary companies with a long history like P&G sometimes have to change direction. Thanks to a significant restructuring of the brand portfolio, P&G is once again able to take advantage of global growth opportunities.
P&G has a long tradition of rewarding shareholders with dividends. P&G has been paying a dividend for 130 years. It has also earned a spot on the dividend aristocrats and dividend kings lists. For its various achievements, P & G received a place on our list of “blue chip” shares. The full list of blue chip stocks can be found here.
The current valuation, which is now close to a decade high, leaves something to be desired from a value point of view. As a result, stocks have a hold recommendation for current dividend yield and dividend growth, but are currently not a buy for valuation reasons.
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