U.S. global stocks and the strong USD

Procter & Gamble: The street says ‘hold’. We say ‘buy’. This dividend aristocrat is one of a few dividend kings—stocks that have raised their dividends for more than 50 consecutive years. There are fewer than 20 of them but dividend-paying multinational corporations like P&G are well represented. Unfortunately, global stocks like P&G face a foreign exchange impact when reporting in US dollars.

In the year to June 30, U.S. consumer goods stock The Procter & Gamble Co. (NYSE─PG) did poorly. This was largely due to the high U.S. dollar and one-time charges. It’s expected to earn marginally more in fiscal 2016 (which began July 1). Still Procter & Gamble owns over a score of brands that each generate yearly sales of at least $1 billion. And it pays generous dividends that it has raised for 59 years in a row. The stock remains a buy for a growing stream of dividends while you wait for long-term share price growth.

Chairman, president and chief executive officer A.G. Lafley said: “In fiscal 2015, P&G delivered strong, double-digit constant currency core EPS growth and very good free cash flow productivity of over 100 per cent on modest organic sales growth.” On this basis, Procter & Gamble’s profit per share climbed 11 per cent.

Procter & Gamble writes, “Core excludes incremental restructuring charges, certain legal reserves, devaluation impacts from Venezuela and the Venezuela charge.” But it includes currency changes. On this basis, core EPS were $4.02 in fiscal 2015 (all figures in U.S. dollars), down 1.7 per cent from $4.09 the year before.

Operates in 70 countries but reports in US dollars

In Venezuela, Procter & Gamble can’t convert currency or pay dividends. So it no longer consolidates the results of its Venezuelan subsidiaries. This cost it a one-time charge of $2.1 billion, or $0.71 a share, last year. In fiscal 2015, this global consumer goods stock’s organic (internal) sales grew in four of its five lines of business: Health Care, up four per cent; Baby, Feminine and Family Care, up three per cent; Fabric Care and Home Care, up two per cent; Grooming, up one per cent. This was only partly offset by a one per cent decline in the organic sales of Beauty, Hair and Personal Care. Organic sales rose one per cent. This reflected a two per cent rise in prices offset by a one per cent drop in shipment volume. The trouble is, the company faced a six per cent foreign exchange impact. That’s because it operates in 70 countries. Fiscal 2015 sales fell 5.3 per cent, to $76.279 billion.

Due to these problems, core earnings are expected to rise marginally, to $4.03 a share. This means that the stock trades at a hefty forward P/E ratio of 18.7 times. Next year, Procter & Gamble is expected to earn core EPS of $4.43. Based on this estimate, the shares trade at a more reasonable forward P/E ratio of 17 times.

Over 20 brands top $1 billion each

Among top consumer goods stocks, Procter & Gamble has a lot going for it. It owns over a score of brands that each generate over $1 billion a year, including Tide (laundry detergent), Crest (toothpaste), Head & Shoulders (shampoo), Gillette (shaving products), Pampers (disposable diapers) and Charmin (toilet paper).

A second plus is that Procter & Gamble’s products generate repeat business. When your Crest toothpaste tube runs out, you buy a new tube of Crest to replace it.

A third plus is that the company is a global consumer goods stock. Growing middle classes in emerging countries should raise sales, despite the currency setback.

A fourth plus is that this high dividend paying stock pays $2.65 a share. That’s an attractive yield of 3.5 per cent. This is likely to improve as this dividend aristocrat continues to raise its dividends, as it has done for 59 consecutive years.

A fifth plus is that Procter & Gamble buys back its own shares. In fiscal 2015, for instance, it spent $4.602 billion to repurchase 21.1 million shares. It now has 2.884 billion shares outstanding—down sharply from a peak of 3.179 billion in fiscal 2006.

A sixth plus is that the firm is well financed. It has $11.612 billion in cash, a safe, low net-debt-to-cash-flow ratio of 1.5 times, and it generates excess cash flow.

Seventh, Mr. Lafley knows what to do. He says: “Our objective is to deliver balanced results across the three main drivers of operating total shareholder returns—sales growth, operating profit margin expansion and free cash flow generation.” Indeed, higher sales with wider profit margins raise earnings and cash flow. This enables Procter & Gamble to keep rewarding you.

Most analysts rate Procter & Gamble a hold. But we regard it as a buy for high and rising dividends while you wait for the share price to rebound.


The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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