PG Stock: The Most Overlooked Reason to Be Bullish on Procter & Gamble Co
Why PG Stock is Still a Top Dividend Pick
There is a simple reason why income investors should pay attention to Procter & Gamble Co (NYSE:PG) stock: dividends. There are companies with higher yields, but few of them can match PG stock’s track record when it comes to dividend growth.
Procter & Gamble has been increasing its dividend every single year for the past 60 years. That makes PG stock a “dividend king,” a title reserved for companies with at least five decades of consecutive dividend increases. Among the thousands of companies actively traded in the U.S. stock exchanges, only 18 of them hold that title.
For PG stock, the latest dividend hike came this April, when the company increased its quarterly dividend rate to $0.6695 per share. At today’s price, Procter & Gamble stock has an annual dividend yield of 3.03%.
If you are wondering whether PG stock could continue its track record of dividend hikes, don’t forget that the century-old company is still growing. In its most recent fiscal quarter, all segments of Proctor & Gamble (Fabric & Home, Baby, Feminine, & Family, Beauty, Health, and Grooming) enjoyed solid growth in both organic volume and organic sales. (Source: “P&G Announces Fourth Quarter And Fiscal Year 2016 Results,” Procter & Gamble Co, August 2, 2016.)
But there is something else that the company has been doing that could make Procter & Gamble stock even more appealing: streamlining operations.
Companies like to use terms like “streaming operations” and “improving efficiency.” And while they don’t sound as exciting as, say, building the next big thing in tech, streamlining operations at Procter & Gamble could create material upside for PG stock.
You see, Procter & Gamble is a giant company. With a history dating back to 1837, the consumer staples company has built a huge portfolio of brands. But not all of them are performing well these days. However, the good news is that the company has decided to revisit its brand portfolio.
Two years ago, P&G announced that it would sell about 90 to 100 brands whose sales had been declining. And if you are worried that selling so many brands would affect the company’s business, don’t be. The 70 to 80 brands that it would keep and focus on accounted for 90% of sales and more than 95% of profit at Procter & Gamble in recent years. (Source: “P&G to sell up to 100 brands to revive sales, cut costs,” Reuters, August 4, 2016.)
Right now, the company is in the process of selling 41 beauty brands to Coty Inc (NYSE:COTY) for $12.5 billion. With fewer brands in its lineup, P&G should be able to free up some capital and put them into its core brands.
Source: Procter & Gamble Co
From the above lists, it’s easy to see that with its core brands, Procter & Gamble is still a dominant player in the consumer staples business. While those products seem a bit low-tech, note that they represent things that consumers need rather than want. This means PG stock could be recession-proof; in a recession, people still need shampoo, razor blades, and toilet paper, don’t they?
P&G have already achieved substantial cost savings. The company delivered cost-of-goods savings at or above targets in each of the last five fiscal years. The original five-year cost-of-goods savings target was $6.0 billion, but P&G delivered $7.2 billion. (Source: “The Procter & Gamble Company’s Management at Barclays Back-To-School Consumer Conference – Earnings Call Transcript,” Seeking Alpha, September 8, 2016.)
Moreover, manufacturing enrolment declined by 22% over the last four years, despite new staffing necessary to support new capacity. Including divestitures, manufacturing enrolment is expected to decline by 30% by the end of its fiscal 2017.
Going forward, Procter & Gamble expects to save as much as another $10.0 billion in costs over the next five years, with the majority of those savings coming from costs of goods.
The Bottom Line on PG Stock
At the end of the day, keep in mind that Procter & Gamble is a 178-year-old company that’s currently in a transition process. PG stock probably won’t shoot through the roof anytime soon, but with a portfolio of strong performing brands that are recession-proof, PG stock could still provide investors with solid dividends for years to come.