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Procter & Gamble Recession Resistant

Procter & Gamble: Recession Resistant Dividend Aristocrat

When volatility grips the stock market, as it has over the past several weeks due to the coronavirus, income investors should focus on quality dividend growth stocks. We believe the Dividend Aristocrats, a group of 64 stocks in the S&P 500 Index that have each raised their dividends for at least 25 consecutive years, are among the highest-quality dividend growth stocks. One such stock is Procter & Gamble, a recession resistant Dividend Aristocrat.

Recessions are disastrous for many companies, particularly those that operate in cyclical sectors of the economy. The consumer staples sector should perform relatively well in a global recession, as consumers will always need certain products such as paper towels, laundry detergent, and toothpaste. 

These products are daily essentials for most people. This will keep consumer staples manufacturers profitable, and allow them to continue paying dividends to shareholders. For this reason, dividend growth investors should continue to hold recession resistant Procter & Gamble (PG).

Procter & Gamble Recession Resistant
Proctor & Gamble: Recession Resistant Dividend Aristocrat

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Proctor & Gamble Business Overview & Recent Events

Procter & Gamble is a consumer products giant that sells its products in more than 180 countries and generates over $70 billion in annual sales. Some of its core brands include Gillette, Tide, Charmin, Crest, Pampers, Febreze, Head & Shoulders, Bounty, Oral-B, and many more. Procter & Gamble has a market capitalization of $290 billion. 

The company, in its current form, is the result of a massive transformation that began several years ago. Procter & Gamble was one of the notable laggards that did not see a huge recovery in sales and earnings-per-share coming out of the Great Recession of 2008-2009. The company had become bloated, with dozens of underperforming brands across multiple categories. 

In response, Procter & Gamble embarked on an aggressive divestment program, designed to get rid of slow-growth brands that were not considered to be a part of the future growth of the company. For example, in 2016 it sold the Duracell battery brand to Berkshire Hathaway (BRK.B) for $4.7 billion, and also sold a collection of 43 beauty brands to Coty (COTY) for $12.5 billion. In all, P&G reduced its total brand count by nearly two-thirds.

The result of these actions is that Procter & Gamble is a higher-growth company with stronger profit margins. In the most recent quarter, Procter & Gamble’s organic sales grew by a solid 5%, led by 8% growth in the beauty segment and a 7% increase in the healthcare segment. Organic volumes increased by 3%, as favorable pricing and mix boosted organic sales even further. Currency-neutral core gross margins increased by ~210 basis points thanks in large part to significant productivity savings, pricing benefits, and commodity cost improvements. 

The company expects sales growth of 4% – 5% and earnings-per-share growth of 8% – 11% for the current fiscal year. It also expects to return about $15 billion to shareholders this year, split roughly evenly between dividends and share repurchases. Procter & Gamble’s cash returns are a big reason to own the stock.

Proctor & Gamble – Steady, Recession Resistant Dividend Growth

Amazingly, the company has paid increasing dividends for 63 consecutive years, one of the longest active streaks of any company. This qualifies the company to be not just a member of the Dividend Aristocrats, but also a member of the Dividend Kings as well. The Dividend Kings are an even more exclusive group of just 30 stocks that have raised their dividends for 50+ consecutive years. With an expected dividend payout ratio of 61% of adjusted earnings-per-share in the current fiscal year, the dividend is sufficiently covered.

We expect Procter & Gamble’s dividend to remain secure, even in a deep and prolonged recession. The company has strong interest coverage, and Procter & Gamble has strong interest coverage, and the company is highly resistant to recessions, as its products are essential to consumers, even in an economic downturn. In the Great Recession, Procter & Gamble saw its earnings-per-share fall only 1.6% in 2009 and 1.4% in 2010. Whenever the next recession shows up, this stock is likely to outperform the market once again. 

Procter & Gamble has significant competitive advantages, specifically its strong brands. It has a number of category-leading brands such as Crest, Tide, Gillette, Bounty, Febreze, Old Spice, Pampers, and many more. These top-tier brands provide Procter & Gamble with consistent profits.

Final Thoughts

There will not be many industries spared if a global recession occurs in the coming months. However, there are a few pockets of relative strength that will continue to provide shareholders with steady dividends, and even dividend growth.

Procter & Gamble is not the cheapest stock around, but it deserves a premium valuation due to its world-class brands and durable competitive advantages. It will remain profitable in a recession, just as it did during the Great Recession of 2008-2009. 

Procter & Gamble has a 2.5% dividend yield, which exceeds the dividend yield of the broader S&P 500 Index. And, it will continue to raise its dividend each year, as it has done for over 60 consecutive years. For these reasons, income investors should hold recession resistant Procter & Gamble.

This was a guest post by Bob Ciura at Sure Dividend.


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5 thoughts on “Procter & Gamble: Recession Resistant Dividend Aristocrat

  1. P&G is a great company. No doubt about that. In a recession, they possess the products that people still buy. I love their recent moves over the last few years to turn the company into a higher growth company. All in all, a lot of great things are happening at PG!

    Bert

    1. Thanks for the comment! The stock did not drop much in the recent downturn, mostly because it focuses on consumer staples and basic necessities. It should do well over the long-term -DP

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