What a year it has been for Procter & Gamble (NYSE:PG) stock. In fact, shares are up 22% in the past year and up 15% year to date. However, although the company is a solid and stable earner, Procter & Gamble stock is nearly fully valued.
That does not mean it will not rise further. It just implies that Procter & Gamble stock will either rise in line with earnings or could move into overvaluation territory.
In other words, it is no longer a bargain-basement pick.
The consumer products company, best known for its Tide, Downey, Gain and Oil of Olay brand names, will report its fiscal first-quarter earnings Oct. 20. Analysts expect the company will report $1.41 per share, up slightly — 2.9% — from earnings per share of $1.37 last year. However, this would represent a 21.5% increase over the prior quarter.
Procter & Gamble will continue along its path of solid growth. For example, in the past four quarters, the company has beat analyst estimates.
Moreover, 21 analysts polled by Seeking Alpha expect the company will make $5.39 this year, up 5.3% over last year. In addition, they forecast earnings per share of $5.77 next year, a YOY gain of 7%.
Valuation Issues Loom
The earnings estimates mentioned above put Procter & Gamble stock at historically average price-earnings ratios. For example, the forecast earnings for 2020 give it a forward P/E ratio of 26.5 times. Its 2021 forecast EPS gives it a P/E of 25 times earnings.
This is about on par with the historical P/E average for Procter & Gamble stock. Although Morningstar shows that the five-year average is 34 times earnings, it includes a large one-year outlier in 2019. Therefore, by excluding that figure, the average P/E for the past six years is 25.4 times.
Moreover, this is not the only indication that the stock is fully valued. Procter & Gamble just declared a quarterly dividend of 79.07 cents per share. Therefore, its annualized dividend yield is 2.19%.
However, over the past four years, the stock has had an average yield of 3.02%. That implies that the stock is overvalued by over 27%. For example, if one divides the annual dividend per share of $3.1628 by the average annual yield of 3.02%, the price should be $104.73 per share. That is below the present price of $143 per share.
However, this does not necessarily mean that Procter & Gamble stock is going to fall anytime soon. In fact, it may do the opposite. As it continues to beat earnings estimates, the stock could easily rise as a winner among a sea of losers.
What to Do With Procter & Gamble Stock
TipRanks reports that 12 analysts have produced new price targets in the last three months on Procter & Gamble. The average price target of these analysts is $146.92. That represents upside of just 2.7% from the current price.
Similarly, MarketBeat reports that the average analyst price target in their poll is just $137.87. That represents a potential 4.52% drop in Procter & Gamble stock.
Now to be fair, this is up from the $133.67 price target 30 days ago. But at that time, the price target represented a potential 8% gain for the stock. Other analysts have been more positive on the stock.
For example, Morgan Stanley recently came out with an extremely positive report on Procter & Gamble, according to Seeking Alpha. Analysts argued that the stock will beat its upcoming quarterly earnings forecasts. Moreover, the firm raised its price target to $158 from $144. That represents a potential gain of 9.4%.
Another analyst, Michael Fitzsimmons, believes an increased focus on health and hygiene will benefit Procter & Gamble stock. He stresses that the company plans on paying out $15 billion in the next year to shareholders. This will come in the form of both share buybacks and dividend payments.
Therefore, I suggest that most investors should consider buying this stock when they are reasonably sure that it is a bargain. For example, buying it on a dip will allow the investor to know that it will likely rebound.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
