by Marc Bastow | April 16, 2013 12:40 pm
Procter & Gamble (NYSE:PG) announced a 7% dividend hike Monday, marking the 56th consecutive year P&G has increased its annual payout in 123 straight years of issuing dividends.
Is there any reason why an income investor would want Procter & Gamble as part of his or her portfolio? This company is the very definition of stability, both in its business model and its payout. But if you’re not familiar with P&G — and you should be — here’s a closer look at three big reasons to love this dividend stalwart:
The beauty of big brand recognition/loyalty: Companies that have it are better prepared to weather economic slowdowns.
Good for P&G, then, that it has plenty.
Tide detergents. Crest oral care products. Gillette shaving products. Pampers baby products. Iams pet food. The product lineup is chock full of items that people are going to buy no matter the state of the economy, and they’re attached to beloved names. To point, of Procter & Gamble’s 50 brands, just less than half generate $1 billion each in annual revenue.
The company also has bolstered some of its brands. For instance, it has modernized the once stodgy Old Spice name in recent years — the latest offerings will include “manly scented” soap products.
Admittedly, the past few years have been difficult for consumer product makers; P&G lowered its revenue and profit forecasts twice last year, while competitors Church & Dwight (NYSE:CHD) and Kimberly-Clark (NYSE:KMB) did the same. Notably, Berkshire Hathaway’s (NYSE:BRK.A, BRK.B) Warren Buffett caught a whiff of the sector’s issues and reduced his exposure to P&G by nearly 11% in Q3 2012.
Still, Procter & Gamble is set apart by price inelasticity that helps shield it from significant drops in revenue. Indeed, while P&G’s 2% annual revenue growth since 2009 isn’t impressive, it’s stable and directionally where we want to see it.
This isn’t to say that the pricing or economic slowdown doesn’t hurt. While revenues have ticked upward, profits have declined in the same period as margins slimmed. P&G management has responded to this by announcing it will lay off approximately 5,700 employees by the end of this year and keeping an active eye on other expenses.
Also, P&G’s sale last year of its Pringles brand to Kellogg (NYSE:K) for $2.7 billion added plenty of money to the coffers while improving the company’s focus by exiting the (human) food business.
Perhaps a bit of an unintended boost is the insertion of Pershing Square’s Bill Ackman into the equation: Ackman’s company now sits with a 21 million-share stake in P&G, and the famously impatient activist investor has already expressed his concerns over the performance of CEO Bob McDonald. Ordinarily I might consider this a strike against management, but I look at this as more of a wake-up call than a notice of execution — and that should only end up helping the company’s motivation to improve performance.
I’ve already mentioned the 56 years of consecutive dividend increases, but also keep in mind that P&G has an active share buyback plan in place. Early last year, the company announced it would repurchase $4 billion in stock, and has since upped that figure to $6 billion.
Back to the dividend: The new payout comes in at 60.15 cents quarterly, good for a yield of 3%. P&G has now boosted its dividend by 10% annually in the past four years, and with a payout ratio of 54%, there’s plenty more room to widen that in the future. Cash isn’t an issue either, at $6.6 billion in the vault plus about $5 billion in free cash flow.
The biggest complaint of the past couple years has been share appreciation — PG shares had improved just 3% annually from Jan. 1, 2010 to the end of 2012, just a third of the S&P 500’s performance in that time. This year, however, Procter & Gamble has exploded, nearly doubling the S&P with 18% returns year-to-date and setting new all-time highs almost daily.
The worry might be, then, that P&G might be somewhat overextended right now, and a price-to-earnings ratio of 21 might bear that out.
But Procter & Gamble’s primary appeals have been the relative safety of its business and its dividend — neither of which look any worse than they did a few months ago.
If you’re building a long-term portfolio focused on income, PG is more than worthy of a spot.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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