Dividend aristocrat is costly but rewarding

US consumer goods stock Procter & Gamble rewards its shareholders with dividend increases and share buybacks. Its solid balance sheet and high cash flow will let it continue to reward you. While the shares aren’t cheap, they remain a buy for gains plus high and rising cash.

US_Consumer_Goods_StocksCincinnati, Ohio-based US consumer goods stock The Procter & Gamble Company, or P&G (NYSE—PG), earned more in fiscal 2017. It’s expected to earn more in fiscal 2018 (which began on Canada Day). Next year, the company is expected to earn record profits. This will give it the means to continue to raise your dividends and buy back its shares. P&G remains a buy for long-term share price gains as well as attractive and growing dividends.

P&G “serves consumers around the world with one of the strongest portfolios of trusted, quality, leadership brands”. It operates in 70 countries. As populous emerging markets get richer, we expect the company’s sales to expand.

Billion-dollar brands pay

P&G’s products are in everyone’s home. The brands include Always, Ambi Pur, Ariel, Bounty, Charmin, Crest, Dawn, Downy, Fairy, Febreze, Gain, Gillette, Head & Shoulders, Lenor, Olay, Oral-B, Pampers, Pantene, SK-II, Tide, Vicks, and Whisper. Most are ‘billion-dollar brands’ (sales of at least a billion dollars a year). These are lucrative.

In the year to June 30, P&G earned core earnings of $10.732 billion, or $3.92 a share. This was up by 6.8 per cent from core earnings of $10.441 billion, or $3.67 a share, the year before.

President and chief executive officer David Taylor said: “We made significant progress on our key priorities: accelerating organic sales growth, continuing to drive strong productivity improvement and cost savings . . . and completing moves to simplify and strengthen our product portfolio.”

Sales volumes inched up across the board

Sales volumes excluding acquisitions and divestitures rose in all of P&G’s operating segments: Beauty (up by one per cent); Grooming (up three per cent); Health Care (up four per cent); Fabric & Home Care (up two per cent); and Baby, Feminine & Family Care (up two per cent). Unfortunately, the higher US dollar more than offset the volume gains. Reported sales slipped by 0.4 per cent, to $65.058 billion.

Earnings per share rose more than total earnings. That’s because P&G spent $5.204 billion to buy back shares. This overcame $2.473 billion issued under stocks options. The diluted weighted average number of shares outstanding fell by 104 million, to 2.74 billion on June 30. The company has repurchased shares in 10 of the last 11 years. The share count has fallen from a peak of 3.179 billion in fiscal 2008.

P&G raised its dividend, to $2.76 a share. It has paid dividends each year since it was incorporated, in 1890. What’s more, this ‘dividend aristocrat’ has raised its dividend for 61 consecutive years. The dividend yields an attractive 3.06 per cent a year.

We expect P&G to keep rewarding you with higher dividends and share buybacks. Its cash totals $5.6 billion. The company’s net debt-to-cash-flow ratio is a safe 1.3 times. And last year’s cash flow of $20.1 billion exceeded net investment of $2.2 billion, net acquisitions of $16 million, dividend payments of $7.2 billion, and net share buybacks of $2.7 billion.

P&G’s earnings are growing, but slowly

This year, P&G expects its earnings to grow by five to seven per cent. Based on an estimate of $4.16 a share, the stock trades at a hefty price-to-earnings, or P/E, ratio of 21.7 times. Next year, the company’s earnings are expected to rise by 5.8 per cent, to $4.40 a share. Based on this estimate, the shares trade at better, but hefty, P/E ratio of 20.5 times.

Mr. Taylor is optimistic about P&G’s prospects. He said: “Looking forward, we will continue to drive productivity improvement and cost savings to provide the fuel for investments needed to accelerate and sustain faster top-line [sales] growth while expanding operating profit margin. Our long-term objective is . . . total shareholder return in the top third of our competitive peer group.”

The consensus recommendation of seven analysts is that P&G is a ‘buy’. While the shares aren’t cheap, we agree. P&G remains a buy for long-term share price gains as well as attractive and growing dividends.

This is an edited version of an article that was originally published for subscribers in the August 11, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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