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3 Reasons Why Church & Dwight Is No Match For Dividend King P&G


Published by Bob Ciura on March 26th, 2017

Procter & Gamble (PG) and Church & Dwight (CHD) are both high-quality companies, with solid dividends.

And, they each have impressive histories of dividend increases.

Procter & Gamble is a member of the Dividend Aristocrats, a group of companies in the S&P 500 that have raised dividends for 25+ years.

You can see the entire list of Dividend Aristocrats here.

Meanwhile, Church & Dwight is a Dividend Achiever, a group of 271 stocks with 10+ years of consecutive dividend increases.

You can see the full Dividend Achievers List here.

Church & Dwight has been a higher-growth company than P&G in recent years. But now that P&G’s huge restructuring is finally complete, this could be about to change.

P&G is a much more efficient company now, meaning its growth rates could catch up to its much smaller competitor.

This article will discuss three reasons why P&G is the better dividend stock of the two.

Reason #1: Dividend Yield & History

The most glaring difference between P&G and Church & Dwight is their respective dividend yields.

P&G has a 3% current dividend yield, while Church & Dwight’s dividend yield is 1.5%.

The reason for this is because Church & Dwight maintains a target payout ratio of 40%, while P&G’s payout ratio typically hovers around 60%-70%.

Church & Dwight chooses to allocate more of its cash flow to acquisitions, to fuel growth.

CHD Acquisitions

Source: 2017 CAGNY Presentation, page 11

With the average dividend yield in the S&P 500 Index hovering around 2%, P&G is a solid above-average dividend yield, while Church & Dwight falls short of average.

P&G’s current yield provides investors with twice as much dividend income as Church & Dwight.

Both companies have strong track records of dividend increases.

Church & Dwight has increased its dividend for 21 years in a row. But few companies can match P&G’s streak of consecutive dividend increases.

PG Dividend

Source: 2016 Fact Sheet, page 2

Not only is it a Dividend Aristocrat, but it is also a Dividend King, an even more exclusive group of companies with 50+ years of consecutive dividend increases.

P&G is one of just 19 Dividend Kings. You can see the entire list of Dividend Kings here.

When it comes to dividend history, P&G is in a class of its own. A big reason for this is because of its industry-leading brand strength.

Reason #2: Brand Strength & Momentum

Church & Dwight has more than 80 brands in its portfolio, and a leadership position across several of these categories.

But it does not have quite the same level of brand strength as P&G.

Church & Dwight has a concentrated portfolio. More than 90% of its annual sales come from just two categories, household and personal care products.

CHD Portfolio

Source: 2017 CAGNY Presentation, page 15

Moving forward, P&G’s portfolio will be centered on roughly 65 brands, in 10 key product categories.

But P&G has a broader portfolio in terms of product categories, which gives it the advantage of having access to higher-growth segments, for example health care.

Health care product sales is P&G’s fastest-growing product segment. Sales increased 4% over the first half of the current fiscal year, due to 5% volume growth.

Thanks to its major restructuring, P&G’s growth could catch up to Church & Dwight’s this year.

For example, the two most transformative deals for P&G were completed last year:

The end result is that P&G is a much more streamlined, efficient company than it used to be.

The businesses P&G sold represented about 14% of fiscal 2013 sales, but only about 6% of the company’s profit.

Even though these brands generated high levels of sales, they were generally lower-margin products, with lower growth potential as well.

The remaining 10 category portfolio has historically grown revenue by one percentage-point faster than P&G’s growth rates before the transformation.

Meanwhile, Church & Dwight’s momentum considerably as the year drew to a close.

For example, Church & Dwight reported earnings-per-share growth of 14% in 2016. But fourth-quarter reported earnings-per-share rose just 2.4%.

Some of this was due to the company’s Specialty Brands segment, which posted a 4.3% sales decline in the fourth quarter.

This segment includes some specific businesses that are not performing well for Church & Dwight, such as specialty chemicals and animal nutrition.

By contrast, P&G’s momentum seems to be accelerating.

PG Momentum

Source: P&G CAGNY Presentation, page 3

P&G’s core earnings-per-share increased 4% last quarter, and the company expects full-year earnings growth in the mid-single digits for the full year.

One why brand strength is so important for consumer products companies is because it gives them pricing power.

P&G increased its prices by 1% in fiscal 2016. Meanwhile, Church & Dwight saw an unfavorable product mix and price deflation of 0.5% in each of the past two quarters.

In addition, brand strength provides companies with scale. P&G has a slightly more advantageous cost structure.

For example, in fiscal 2016 P&G generated a gross margin of 50%, compared with a 45% gross margin for Church & Dwight last year.

Reason #3: Emerging Market Growth

Church & Dwight is much more focused on the U.S. than P&G. International revenue makes up just 14% of Church & Dwight’s total revenue.

P&G is more geographically diversified than Church & Dwight. It generates a much higher portion of its sales from international markets.

PG Geography

Source: 2016 Fact Sheet, page 2

Approximately 56% of its annual revenue is derived outside the U.S.

The fact that Church & Dwight is much more focused on the U.S. provides it with an advantage now, because the company is shielded from the effects of currency fluctuations.

But P&G could have a big advantage over the long term, because emerging markets present compelling growth opportunities going forward.

Approximately 35% of P&G’s annual revenue comes from under-developed markets, particularly in Latin America, Africa, and Asia.

This could be a tailwind for P&G—last quarter, P&G’s organic sales increased 3% in China, its second-biggest market.

China is a very attractive market for consumer goods companies, because the country has a population of 1 billion, high economic growth, and its consumers are enjoying rising standards of living.

Final Thoughts

P&G and Church & Dwight are both highly profitable companies, with solid track records of paying and raising their dividends over time.

Church & Dwight has earned a reputation as being a growth stock within the consumer goods sector, although its growth rate has slowed down lately.

Conversely, while P&G has a reputation for being a lumbering giant, its restructuring has made it much nimbler. This could allow it to grow at a rate that rivals its smaller competitors.

In addition, Church & Dwight’s paltry 1.5% yield is fairly unattractive for income investors.

As a result, income investors should view P&G as the better dividend stock.



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