Is There More to Procter & Gamble Stock’s 3.3% Yield?
When you think of Procter & Gamble Co (NYSE:PG) stock, dividends are probably the first thing to come to mind. But, with what the company has been doing lately, PG stock might be able to see some serious upside as well. Let me explain.
“Less Will Be Much More”
Many companies like to talk about their expansion projects. But, for this 179-year-old consumer staples giant, getting on a diet might not be a bad idea.
You see, over the years, Procter & Gamble has grown its portfolio to well over 100 brands. While some have brought in huge amounts of revenue, others haven’t done so great. Moreover, it is quite costly to maintain such a large portfolio. If the company can get rid of the brands that were underperforming, it could free up some capital to focus on its core brands.
And that’s exactly what Procter & Gamble has done. Two years ago, the company announced that it would sell up to 100 brands whose sales were declining and focus on its core brands. Note that the 70 to 80 brands it decided to keep accounted for 90% of sales and more than 95% of profit. (Source: “P&G to sell up to 100 brands to revive sales, cut costs,” Reuters, August 4, 2014.)
“Less will be much more,” said A.G. Lafley, Procter & Gamble’s chief executive officer. (Source: Ibid.)
The plan turned into action. In October of this year, P&G sold its specialty beauty business, which includes 41 brands, to Coty Inc (NYSE:COTY) in a $12.5-billion deal. (Source: “Coty Completes Merger with P&G Specialty Beauty Business,” Coty Inc, October 3, 2016.)
Streamlining operations seems to be a theme in the corporate world today. But, instead of just talking about it, Procter & Gamble has actually done it. The company is now focusing on 10 large categories where it already holds leading positions.
Procter & Gamble Stock: A Safe Haven for Dividend Investors
So Procter & Gamble has reduced the number of brands in its portfolio. But the brands that gave the company wide economic moats are still there. The key to note here is the nature of the company’s business. There are many companies with better growth prospects than P&G. But, when it comes to longevity and being a safe haven for investors, few can match this century-old consumer staples giant.
As an income investor, you want companies that can pay you not just when the economy is booming, but when times are tough as well. That’s where PG stock really stands out, because, no matter where we are in the economic cycle, people will still need toothpaste, laundry detergent, and toilet paper. Those products don’t sound exciting at all, but they have been bringing in tens of billions of dollars of revenue to Procter & Gamble year after year.
The best part about having an entrenched position in a slow-changing industry is that the company can distribute some of its profits to shareholders. In fact, PG stock started doing that more than a century ago. The company has been paying a dividend for 126 years and has raised its payout in each of the last 60 years.
Right now, the company pays $0.6695 on a quarterly basis, giving PG stock an annual dividend yield of 3.28%.
PG Stock’s Downturn Could Be an Opportunity
When a company offers such impressive payouts and could be recession-proof, you’d expect investors to rush towards it. But lately, that hasn’t really been the case. In the past three months, PG stock tumbled nearly eight percent.
The thing is, though, nothing has really changed about the fundamentals of the company. Its most recent earnings report showed that organic sales have grown in all five main categories, while the company’s core earnings grew five percent year-over-year. (Source: “P&G Announces First Quarter Earnings,” Procter & Gamble Co, October 25, 2016.)
Value won’t go unnoticed forever. Once the market realizes how special Procter & Gamble is, PG stock could see a material upside.