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Here’s the Most Overlooked Reason to Consider Procter & Gamble Co Income Investors 2019-05-02 09:19:24 Procter & Gamble Co PG PG stock NYSE PG Procter & Gamble stock P&G Procter & Gamble Most people don't know about this metric, but it shows what's perhaps the most important reason for investors to consider Procter & Gamble Co (NYSE:PG). Procter & Gamble Stock

Here’s the Most Overlooked Reason to Consider Procter & Gamble Co

Why Procter & Gamble Stock Deserves Your Attention

Dividend investors are no stranger to Procter & Gamble Co (NYSE:PG). The company has been around for over a century and has paid increasing dividends for decades.

But this earnings season, investors didn’t seem to be particularly enthusiastic about what the consumer staples giant had to say. Procter & Gamble reported quarterly results on Tuesday, April 23 before market open. In the trading session following the news release, PG stock slipped 2.7%.

And it’s not like the earnings report was bad. In the third quarter of P&G’s fiscal year 2019, which ended March 31, it generated $16.5 billion in net sales, representing a one-percent increase year-over-year. After excluding the impacts from acquisitions, divestitures, and exchange rate fluctuations, the company delivered organic sales growth of five percent. (Source: “P&G Announces Fiscal Year 2019 Third Quarter Results,” Procter & Gamble Co, April 23, 2019.)

Bottom-line results were even more impressive. For the quarter, Procter & Gamble’s core earnings came in at $1.06 per share, up six percent from the year-ago period. Excluding the impacts from foreign change, the company’s currency-neutral core earnings per share would have been up 15% year-over-year.

Both top- and bottom-line results also beat Wall Street’s expectations. On average, analysts were expecting P&G to report earnings of $1.03 per share on $16.4 billion of revenue for the quarter.

In other words, PG stock’s post-earnings drop seems just like another example of how unpredictable “Mr. Market” can be these days: A company can deliver a perfectly good earnings report, and its stock could still tumble on the news.

When a stock has just had a massive rally, it’s not uncommon for it to experience some pullback in earnings season. Looking at Procter & Gamble, we see that its stock price has surged more than 47% over the past 12 months, substantially outperforming the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite.

Procter & Gamble Co Stock Chart

Chart courtesy of

The company has also delivered some good news to income investors. Last month, P&G declared a quarterly cash dividend of $0.7459 per share, representing a four-percent increase from its previous payment of $0.7172 per share. Notably, the announcement marked the company’s 63rd consecutive annual dividend hike. (Source: “P&G Declares Dividend Increase,” Procter & Gamble Co, April 9, 2019.)

Looking further back, you’ll see that this consumer staples company has been returning cash to investors through dividend payments every year since its incorporation in 1890.

Trading at $104.35 apiece at the time of writing, Procter & Gamble stock offers investors an annual yield of 2.9%.

Free Cash Flow Productivity

Of course, past performance is no guarantee of future results. But here’s why I believe PG stock remains a top pick for dividend investors.

This is perhaps the most overlooked reason to like PG stock. In earnings season, Wall Street puts every company’s revenue and earnings figures under the microscope. For income investors, it’s important to remember that earnings can be adjusted, but dividends are cold hard cash paid to shareholders. And for a company to maintain a dividend track record, it needs the ability to generate free cash flow.

Simply put, free cash flow is the amount of cash a company generates from its operations after deducting capital spending. It is an important metric in dividend analysis because it can be used to determine the amount of cash available for paying dividends, repurchasing shares, and making strategic acquisitions.

In the case of Procter & Gamble Co, the company also reports something called free cash flow productivity. It is defined as the ratio of free cash flow to net earnings. In the March quarter, P&G’s free cash flow productivity was 100%, indicating that it had a strong ability to generate cash.

And as you’d expect for a company that’s great at generating cash, Procter & Gamble returns a huge amount of cash to investors. For the quarter, it spent $1.9 billion on dividends and $1.3 billion on buybacks. Over the past decade, the company has returned a whopping $67.0 billion to shareholders through cash dividends alone.

Going forward, the consumer staples giant is expected to continue to grow its business. As a matter of fact, management had just raised their top line guidance. Previously, they were projecting an organic sales growth of two to four percent in full-year fiscal 2019. Now, they expect Procter & Gamble’s organic sales growth to come in at a solid four percent for the year.

At the bottom line, management expects Procter & Gamble’s core earnings per share to improve by three to eight percent from fiscal 2018.

As for the most overlooked factor, free cash flow productivity, P&G’s management previously said that they expect this metric to be above 90% for the full year. Now, the outlook for the company’s free cash flow productivity has been raised to “at least 100% for fiscal 2019.” (Source: Procter & Gamble Co, op cit.)

The Bottom Line on Procter & Gamble Co

At the end of the day, don’t forget that Procter & Gamble runs a recession-proof business. Whether the economy is booming or not, P&G’s products, such as “Tide,” “Gillette,” and “Bounty,” are always on consumers’ shopping lists.

This allows the company to generate recurring profits. And as we just looked at, Procter & Gamble is great at generating free cash flow from this profitable business. Therefore, it can return a substantial amount of cash to investors through dividends and buybacks.

As it stands, PG stock remains a top dividend stock for 2019 and beyond.

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