Procter & Gamble (PG) Dividend Safety Analysis

In times of market turmoil, it is prudent to own low-volatility stocks. Procter & Gamble (PG) qualifies as one having a 5-year beta of about 0.45, meaning the stock provides ballast in a down market. Recent performance in early 2022 validates this view as the stock is down only about (-4.3%) compared to (-15.8%) for the S&P 500 Index, according to Stock Rover*. In addition, other characteristics contribute to P&G’s dividend safety and place it on our best dividend growth stocks list. First, the company is the market leader for consumer products. Next, only 13 companies have raised their dividend for 60+ years, including P&G, a Dividend King. But the stock is rarely undervalued, and investors often have few opportunities to buy it at a discount. However, P&G’s dividend safety and growth trajectory make it a long-term buy.

Overview of Procter & Gamble

P&G was founded in 1837. The company has grown dramatically since then. Today, it is one of the world’s largest consumer product companies worldwide, selling in more than 180 countries. The company operates in five business segments: Beauty (19% of revenue), Grooming (9% of revenue), Health Care (13% of revenue), Fabric & Home Care (34% of revenue), and Baby, Feminine & Family Care (25% of revenue). In addition, P&G has been selling non-core and smaller brands for the past several years. 

P&G has many well-known brands divided into ten categories. The brands include Tide, Pampers, Olay, Old Spice, Secret, Head & Shoulders, Ivory, Pantene, Herbal Essences, Charmin, Gillette, Bounce, Always, Crest, etc. The company has 21 $1+ billion brands. The company’s portfolio of brands are market leaders. P&G has about 20% market share of baby care, 60%+ share of blades and razors, about 25% market share of feminine protection, and more than 25% market share of fabric care.

Total revenue was about $76,118 million in fiscal 2021 and $79,618 million in the past 12 months. International revenue provides 55% of total revenue.

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Procter & Gamble’s Dividend and Growth

P&G has paid a dividend since 1891, making it one of 23 companies to do so for more than 100 years in a row. This fact has placed it on the list of longest dividend paying companies. In addition, according to Portfolio Insight*, it has increased the dividend for 66 consecutive years, making the stock a Dividend King, Dividend Aristocrat, and Dividend Champion. P&G is also in the Dow Jones Industrial Averages (DJIA). Furthermore, P&G is extremely popular with investors following a dividend growth strategy. The company has nearly 250k followers on Seeking Alpha and is one of many best lists.

Dividend Yield

The forward dividend yield is about 2.36%, based on a forward dividend rate of $3.65 per share. The dividend yield is almost double that of the S&P 500 Index. P&G’s dividend yield was much higher a few years ago when it struggled with revenue and earnings growth. However, divesting brands and focusing on core brands with higher potential resulted in 15 straight quarters of growth. Consequently, the stock price has been bid up, and the dividend yield has declined. 

The chart below is from Portfolio Insight* and shows P&G’s dividend yield history. The 5-year average dividend yield is 2.76%, higher than the forward yield of ~2.36%. The yield periodically goes over 3.5%, which is likely an excellent time to add shares to existing positions. Interestingly, P&G’s dividend yield did not spike significantly during the COVID-19 bear market, indicating investors viewed it as a safe stock. The yield has not spiked during the current market downturn in early 2022.

Dividend Growth

P&G’s dividend growth is consistent but unremarkable. According to Portfolio Insight*, the 5-year dividend growth rate is ~4.94% CAGR, while the 10-year rate is 5.16%. A roughly 5% dividend growth rate means the dividend will double every 14.21 years based on the Rule of 72. P&G’s most recent dividend increase was 5% to $0.9133 per share from $0.8698 per share in April 2022.

P&G’s Dividend Safety

We next analyze P&G’s dividend safety based on earnings, free cash flow (FCF), and debt. These metrics are known to be important for long-term dividend safety. A stock may show short-term fluctuations, but these usually occur due to temporary headwinds. The long-term stability of these metrics is essential for consistent dividend safety.

Payout Ratio

On a trailing basis, the company earned $5.66 per share based on data from Portfolio Insight*. The dividend was $3.40 per share. These values give a trailing payout ratio of about 60%, below the cutoff we use for this metric. On a forward basis, adjusted EPS coves the dividend too. Consensus adjusted earnings per share for fiscal 2022 is $5.85 per share, and the forward dividend is $3.65 per share. These numbers give a forward payout ratio of about 61%, a reasonable conservative value, although we would like a lower number.

Free Cash Flow

P&G’s dividend is also well covered by FCF. The cash required to pay the dividend has steadily grown in the past decade. The dividend required $8,561 million in 2021, while it required $6,332 million a decade ago in 2012, growing at about 3.5% CAGR. Share buybacks reduced the total share count limiting the growth rate. In the past 12 months, operating cash flow (OCF) was $17,131 million, and FCF was $13,953 million. The dividend required $8,705 million, giving a dividend-to-FCF ratio of roughly 62%. This value is below our criterion of 70%.

Balance Sheet

The financial position is a huge positive for P&G. at the end of Q3 fiscal year (FY) 2022, P&G had $8,526 million in cash and cash equivalents. There was no short-term debt, but the current long-term debt was $9,902 million. In addition, the company had $23,767 million in long-term debt. This amount of debt sounds high, but not for a company the size of P&G with its cash flow. Additionally, total debt has been stable for almost a decade.

The leverage ratio is a conservative ~1.3X, and interest coverage is more than 42X. Furthermore, P&G has an AA-/Aa3 high-grade investment credit rating from S&P Global and Moody’s. Few companies can match this credit rating.

Overall, P&G has excellent dividend safety.

Final Thoughts on Procter & Gamble (PG) Dividend Safety Analysis

Procter & Gamble stock is a popular dividend growth stock. It is not a high-growth stock, but it grows slowly and steadily. Consequently, the dividend has grown steadily for the past 66 years. In addition, the company has paid a dividend for 130+ years. The stock is probably slightly overvalued now. However, the stock proves its worth in volatile markets and is arguably one of the safest Dividend Kings. Investors should keep an eye on P&G for future opportunities.

Disclosure: Long PG

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