Updated on March 18th, 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 generated strong profits year after year, even during recessions, and have proven the ability to grow their earnings steadily over many years.
The Dividend Aristocrats are a group of companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. Of the ~505 stocks that comprise the S&P 500 Index, just 65 currently qualify as Dividend Aristocrats.
You can download an Excel spreadsheet with the full list of Dividend Aristocrats by clicking on the link below:
Once per year, we review each of the Dividend Aristocrats. Up next in the series is consumer products behemoth Procter & Gamble (PG). P&G has paid dividends for 130 years, and has increased its dividend for an amazing 64 consecutive years.
Not only is the company a Dividend Aristocrat, it is a Dividend King as well. The Dividend Kings have increased their dividends for 50+ consecutive years. You can see all the Dividend Kings here.
Procter & Gamble is one of the most well-known dividend stocks, largely due to its extremely long dividend history and its widely recognizable brands. P&G recently completed a major overhaul of its product portfolio, including a significant divestment of brands no longer deemed necessary. It is now more focused and efficient, with renewed growth potential.
This article will discuss P&G’s recent portfolio transformation, future growth prospects, and stock valuation.
Procter & Gamble is a consumer products giant that sells its products in more than 180 countries and generates over $70 billion in annual sales. Some of its core brands include 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 stock.
During P&G’s massive portfolio restructuring over the past few years, the company sold off dozens of its consumer brands. Asset sales include battery brand Duracell 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 slimmed down to just 65 brands, down from 170 previously.
Source: Investor Presentation
The benefit of the restructuring is that P&G held on to its core consumer brands such as Tide, Charmin, Pampers, Gillette, and Crest, while shedding low-margin businesses 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 slimmed 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 stock. These share repurchases have improved P&G’s earnings-per-share growth.
On January 20th, 2021 Procter & Gamble released Q2 fiscal year 2021 results for the period ending December 31st, 2020 (Procter & Gamble’s fiscal year ends June 30th.) For the quarter, the company generated $19.7 billion in sales, an 8.3% increase compared to Q2 2020. This result was led by growth across the board. The company’s five reporting segments –Beauty, Grooming, Health Care, Fabric & Home Care and Baby, Feminine & Family Care –posted increases of 6%, 5%, 9%, 12% and 6%, respectively.
Net earnings equaled $3.854 billion or $1.47 per share compared to $3.717 billion or $1.41 per share Q2 2020. On an adjusted basis, core earnings-per-share increased 15.5% year-over-year, to $1.64. Procter & Gamble also increased its fiscal 2021 sales estimate from previous guidance of 3% to 4%, to revised guidance of 5% to 6% growth. In addition, the company anticipates 8% to 10% core earnings-per-share growth from last year’s mark of $5.12 per share.
Margin expansion is a major component of P&G’s earnings growth strategy. P&G’s cost-cutting efforts have elevated its operating margins and after-tax profit margins toward the top of its peer group.
Another growth catalyst for P&G is through acquisitions, such as the $4.2 billion acquisition of Germany-based pharmaceutical giant Merck’s global consumer health business. The acquisition included 10 core brands in vitamins, nutritional supplements, and other over-the-counter products.
According to Merck, the global OTC market is expected to grow 5% annually through 2025, which explains why P&G wants to invest more heavily in this area.
Proctor & Gamble had a difficult time growing for the better part of the last decade, but the tide has been turning in the company’s favor since its turnaround was completed. We are forecasting 4% annual earnings-per-share growth over the next five years.
Competitive Advantages & Recession Performance
P&G has several competitive advantages. The first is its strong brand portfolio. P&G has several brands that generate $1 billion or more in annual sales. The 65 remaining core brands hold leadership positions in their respective categories. These products are associated with high quality, and consumers will pay a premium for them.
To retain its competitive position, the company invests heavily in advertising, which it can do thanks to its financial strength. The company invests billions more each year in research and development. This investment is a competitive advantage for P&G; R&D fuels product innovation, while advertising helps market new products and gain share.
P&G’s competitive advantages allow the company to remain profitable, even during periods of recession. Earnings held up very well during the Great Recession:
- 2007 earnings-per-share of $3.04
- 2008 earnings-per-share of $3.64 (19.7% increase)
- 2009 earnings-per-share of $3.58 (-1.6% decline)
- 2010 earnings-per-share of $3.53 (-1.4% decline)
As you can see, P&G had a very strong year in 2008, with nearly 20% earnings growth. Earnings dipped only mildly in the following two years.
This was a very strong performance, in one of the worst economic downturns in the past several decades. The company continued to perform well over the past year when the coronavirus pandemic sent the U.S. economy into recession. Once again, P&G generated stable profits and raised its 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 & Expected Returns
Based on expected earnings-per-share of $5.60 for fiscal 2021, along with a current stock price of $129, P&G is presently trading at a price-to-earnings ratio of 23.
Over the past decade, shares traded with an average valuation around 20 times earnings. As such, shares appear to be more than fully valued. The improved growth prospects of the company appear to be priced in, and then some. If P&G’s valuation were to revert back to 20 times earnings, which is our estimate of fair value, future shareholder returns would face a -2.8% annual reduction over the next 5 years.
Earnings growth and dividends will help offset the impact of a contracting price-to-earnings multiple. For example, we expect P&G to generate 4% annual earnings growth through 2026, and the stock has a current dividend yield of 2.4%.
However, adding it all up leaves uninspiring total return potential in the low single-digits on an annualized basis. Total returns are expected at 3.6% per year, as the impact of a declining valuation multiple effectively offsets the company’s expected EPS growth. Granted, this estimate could be too conservative if shares were to continue trading at an elevated valuation, or if growth were to formulate at a quicker pace. Of course both of these items are far from certain.
The current dividend payout is well-covered by earnings, with room to grow. Based on expected fiscal 2020 earnings, P&G has a payout ratio of just under 60%. This leaves enough cushion for future dividend increases each year, in the low-to-mid single-digit range.
Source: Investor Presentation
Investors should expect P&G to continue increasing its dividend each year, for many years to come. It has the brand strength, competitive advantages, and profitability to maintain its steady and annual dividend increases over the long-term.
P&G has many strong qualities that make it a time-tested dividend growth company. But legendary companies with long histories, such as P&G, may at times need to change direction. Thanks to a significant reshuffling of its brand portfolio, P&G once again is positioned to capitalize on global growth opportunities.
P&G has a long history of rewarding shareholders with dividends. P&G has been paying a dividend for 130 years. It has also earned a place on both the Dividend Aristocrats and Dividend Kings lists. For its various accomplishments, P&G earns a place on our list of “blue chip” stocks. You can see the full list of blue chip stocks here.
However, the current valuation – now sitting near a decade high – leaves something to be desired from a value perspective. As a result, shares have a hold recommendation for the current dividend yield and dividend growth, but are not a buy right now on valuation concerns.