PG Stock: Dividend Outlook Improving for 2017
Procter & Gamble Co (NYSE:PG) stock is one that income investors love to own in order to earn top dividends, and I totally support this love affair.
There are many stocks that you can find offering dividend yields much higher than the three percent which PG stock is supporting. However, a higher dividend yield isn’t the only thing that satisfies investors with a long-term horizon.
The biggest differentiating factor is how solid the company’s business model is, and whether or not the business can generate the kind of returns which could support its dividend commitment every year. With this criteria, I think there are a few companies which can match Proctor & Gamble stock’s performance.
The company has been increasing its dividend every single year for the past 60 years. That makes PG stock a “dividend king,” a title very hard to earn. For this, a company must increase its dividends for at least five consecutive decades. Only 18 companies out of thousands of listed businesses meet that criteria.
Since I wrote my last column on PG stock and its potential to reward investors with decent returns on their investments, the company has announced its first-quarter earnings, which beat market expectations. The company reported a better-than-expected quarterly profit, helped by cost-cutting and strong demand for its baby, feminine, and home care products.
This positive development has sent PG stock soaring over four percent, showing that its brand restructuring and cost-cutting efforts have started to pay off.
P&G’s net income attributable to the company rose to $2.71 billion, or $0.96 per share, in the quarter, from $2.6 billion, or $0.91 per share, in the same period a year ago. Excluding one-time items, P&G earned $1.03 per share from continuing operations, beating the average analyst estimate of $0.98. (Source: “P&G Announces First Quarter Earnings,” Procter & Gamble Co, October 25, 2016.)
“Our first quarter results mark a good start to the fiscal year,” said Chief Executive Officer David Taylor. “We are now focusing all our efforts on 10 large, structurally attractive categories where P&G holds leading positions.” (Source: Ibid.)
This is very encouraging news for long-term investors in PG stock, as it shows that the company has reversed the declining trend in quarterly sales as it reorganizes its brand portfolio.
Proctor & Gamble has been selling off unprofitable brands and focusing on core brands such as “Tide,” “Pampers,” and “Gillette.” P&G sold 41 of its brands, including “Clairol” and “Wella,” to Coty Inc (NYSE:COTY) in a $12.5-billion deal earlier this month. This restructuring is also coupled with efforts to cut costs to save as much as $10.0 billion over the next five years. (Source: Ibid.)
These efforts have been helping PG stock to outperform the market with a big margin. This year, PG stock has gained more than 10%, double the size of gains produced by the S&P 500 during the same period.
Bottom Line on PG Stock
But dividend and capital gains aren’t the only factors which make me bullish on this stock. PG plans to return $70.0 billion to shareholders through 2019 by buying back its shares. In the first quarter alone, PG spent $1.0 billion on buying back its common stocks and returned $1.9 billion of cash to investors in dividends. (Source:Ibid.)
Buying back shares is the other way that companies reward investors, and PG stock tops the ranks in this category as well.
I always prefer companies with huge buybacks, because when a company reduces its share count, remaining owners’ profit per share increases.
I think PG stock will be in for a great ride next year as the company’s restructuring helps strengthen its cash flows with a portfolio of strong-performing brands. If this performance continues, you won’t be overambitious in expecting a larger dividend increase early next year from PG stock.