Procter & Gamble Co: “Boring” Dividend Stock Delivers Exciting Returns
Big Returns From PG Stock?
If you’ve been following this column, you’d know that consumer staples are one of my favorite types of businesses. It’s nothing exciting, but once a consumer staples company establishes an entrenched market position, it should be able to dish out a very reliable stream of dividends.
Procter & Gamble Co (NYSE:PG) serves as the perfect example.
P&G has been in business since 1837. Today, it operates through five main segments and has established market positions in each one: “Baby, Feminine and Family Care,” “Beauty,” “Fabric and Home Care,” and “Health and Grooming.” (Source: “About P&G,” Procter & Gamble Co, last accessed January 24, 2020.)
The company has operations in about 70 countries and its products are sold in more than 180 countries around the world.
Many of the company’s brands have become household names, including “Bounty,” “Crest,” “Gillette,” “Head and Shoulders,” “Oral-B,” and “Tide.” Across P&G’s product lineup, the company now has 23 brands that generate more than $1.0 billion in annual sales.
The neat thing about P&G’s business is that the demand for its products tend to stay relatively consistent throughout the economic cycle. Think about it: in a recession, new car sales typically go down, but laundry detergent and paper towels will likely remain on a household’s shopping list.
As a result of this recession-proof business, Procter & Gamble has been providing investors with reliable cash dividends through thick and thin.
Since the company’s incorporation in 1890, it has paid dividends to shareholders every single year. Better yet, the company has increased its dividend every year for the past 63 years. (Source: “P&G Declares Dividend Increase,” Procter & Gamble Co, April 9, 2019.)
Mind you, dividends aren’t the only thing Procter & Gamble stock investors have gotten from the company over the years. The company also boasts solid share-price performance.
As is the case with most blue-chip companies, early investors of Procter & Gamble Co have been laughing all the way to the bank. But even investors who got on board as late as last year have locked in some decent gains. Over the past 12 months, PG stock has surged about 31%.
That was quite an impressive rally, since P&G was already a giant company commanding hundreds of billions of dollars of market capitalization. It’s a great example of how a seemingly boring business can still deliver exciting returns in this day and age.
Of course, that doesn’t mean Procter & Gamble stock will keep going up forever. For instance, when the company reported earnings in the morning of January 23, its shares actually fell more than two percent in pre-market trading.
The main reason for that early-morning dip in PG stock’s price was the company’s top-line number in the earnings report. In the second quarter of P&G’s fiscal-year 2020, which ended December 31, 2019, the company generated $18.2 billion of revenue. (Source: “P&G Announces Fiscal Year 2020 Second Quarter Results,” Procter & Gamble Co, January 23, 2020.)
Wall Street, on the other hand, expected the company to report almost $18.4 billion of revenue. This was the company’s first revenue miss in five quarters.
But don’t think for one second this was a reason to ditch Procter & Gamble stock. If you take a deeper look at the earnings report, you’d see that the company’s dividend theme remains intact.
Procter & Gamble Co Is Ready to Pay More Dividends
First of all, despite missing analysts’ revenue expectations in the last quarter, Procter & Gamble’s reported revenue of $18.2 billion actually represented a five-percent increase year-over-year. After excluding the impacts of currency translation, acquisitions, and divestitures, P&G’s organic sales were also up five percent.
The company also generated core earnings of $1.42 per share in the second fiscal quarter, which marked a 14% improvement from a year ago. On a currency-neutral basis, P&G’s core earnings per share were up by 15%.
Furthermore, Procter & Gamble has a quarterly dividend rate of $0.7459 per share. Therefore, in the reporting quarter, the company was paying out just over half of its profits. A low payout ratio like this not only leaves a wide margin of safety, but also gives management plenty of room for future dividend increases.
Going forward, Procter & Gamble plans to continue its growth momentum. For full-year fiscal 2020, management expects organic sales to increase by four to five percent and core earnings per share to increase by eight to eleven percent.
Combined with a durable business model and a conservative payout ratio, it’s easy to see that another dividend increase should be in the works.
Trading around $125.00 per share, PG stock offers an annual dividend yield of about 2.4%. While the yield may not seem that impressive, Procter & Gamble Co’s continuous dividend increases will likely result in its shareholders collecting much higher yield on cost in the years ahead.