Dividend Aristocrats have been the best choice for long-term income investors for many decades. These companies are known not just for their regular dividend payouts, but also for their impressive record of increasing their dividend payments every year for more than 25 years. Such a consistent performance is a testament to their financial robustness, resilience amidst varying economic conditions and shareholder-friendly policy. Adding such stocks to an investment portfolio offers the advantages of a reliable dividend payment and a chance for long-term capital growth.
In a previous analysis, Dover Corp. (DOV), with its 68-year streak of dividend increases, was spotlighted. This discussion will take a closer look at Procter & Gamble Co. (PG, Financial), which boasts a notable 67-year streak of consistent dividend increases.
Global dominance in many brand categories
Procter & Gamble, founded in 1837, is a global leader in fast-moving consumer goods. The company operates across five main segments: Beauty, Grooming, Health Care, Fabric & Home Care and Baby, Feminine & Family Care. Its portfolio includes many globally recognized brands that consumers know well, such as Head & Shoulders, Pantene, Olay, SK-II, Oral-B, Downy and Tampax.
The company derives the majority of its revenue and earnings from two primary segments: Fabric & Home Care and Baby, Feminine & Family Care.
The Fabric & Home Care segment contributed 35% of total revenue and 32% of total net earnings. Within this segment, with flagship brands such as Tide, Ariel and Downy, the company has solidified its position as the global market leader, capturing an impressive 35% of the market. Additionally, its footprint in the home care market is robust, with a 25% market share, thanks largely to the success of brands like Cascade, Dawn, Febreze and Swiffer.
The Baby, Feminine & Family Care segment has been another significant driver, accounting for 25% of total revenue and 23% of net earnings in 2022. In the baby care segment, with the Pampers brand leading the way, Procter & Gamble dominates the global market with a share exceeding 20%. In the feminine care arena, the Always and Tampax brands command a substantial 25% of the global market. The company's influence is also evident in the adult incontinence segment, where Always Discreet enjoys a market share of over 10% in its main markets. Not to be overlooked, the family care business, anchored by Bounty and Charmin, though primarily centered in North America, boasts impressive market shares of over 40% and 25% respectively.
Two decades of steady revenue and income growth
Since 2002, Procter & Gamble has consistently demonstrated growth in both revenue and operating income. The company's revenue escalated from $40.24 billion in 2002 to $82 billion in 2022, reflecting a compounded annual growth rate of 3.62%. Meanwhile, its operating income rose from $7.7 billion to over $19 billion during the same timeframe, achieving a CAGR of 4.6%. This relatively steeper growth in earnings as compared to revenue indicates enhanced margins and streamlined expenses over the years, leading to a bolstered operating margin for the company. The operating margin, despite some variations, improved from 19.15% to 23.24%.
Strong capital structure and efficient debt management
Over the years, Procter & Gamble has achieved significant growth in revenue and operating income, supported by a robust capital structure. As of September, the company reported $48 billion in shareholders' equity and $9.73 billion in cash. Meanwhile, it carried $24 billion in long-term debt and an additional $11.8 billion as the current portion of long-term debt. The company's total debt-to-capital ratio is approximately 39.6%. This suggests a significant portion of the company's capital comes from equity rather than debt, aligning with its aim to balance growth with financial stability.
The most reassuring thing for investors and stakeholders is the company's robust interest expense coverage. With an operating income-to-interest expense ratio of a staggering 23.17, Procter & Gamble comfortably outpaces its interest obligations. The high multiples underscore the company's capability to manage its debt efficiently, indicating its income generation far exceeds the costs associated with its borrowed capital. Such a strong position offers Procter & Gamble a comfortable buffer against unforeseen financial downturns and positions it for sustained growth in the future.
Dividend legacy: A closer look at payout ratios and special charges
Procter & Gamble stands as a premier Dividend Aristocrat in the global stock market, boasting an uninterrupted dividend payment record for 133 years since 1890. Impressively, it has also consistently increased its dividend for the past 67 years. In the past two decades, the dividend per share has increased from 76 cents in 2002 to $3.68 in 2022.
Over the past 20 years, the payout ratio has been quite reasonable most of the time. In 2022, the payout ratio remained at a comfortable 61.41%. However, there were notable spikes in 2015 and 2019, when the ratios reached 103.57% and 192.40%, respectively. This suggests that, in those years, the company distributed more in dividends than it earned, likely to uphold its record of continuous dividend increases.
Investors need not be concerned about Procter & Gamble's dividend payout exceeding its earnings. In 2015, the company faced a deconsolidation charge in Venezuela amounting to over $2 billion, along with an impairment charge nearing $2.1 billion for its battery business. When adjusting for these one-time, non-cash charges, the 2015 operating cash flow and free cash flow surpassed those of 2014. Despite a net income of just over $7 billion in 2015, the free cash flow stood at $10.88 billion, which adequately covered the dividend payment exceeding $7 billion.
In 2019, the company incurred another substantial non-cash impairment charge of $8.3 billion for Shave Care goodwill, which brought its net profit down to approximately $3.9 billion. After adjusting for this charge, the operating cash flow and free cash flow were reported at $15.24 billion and $11.9 billion, respectively. This enabled the company to confidently distribute dividends totaling $7.5 billion to its shareholders.
Thus, the initially perceived high payout was due to non-cash one-off charges that minimally impacted the company's operating and free cash flow. A closer examination indicates Procter & Gamble was prudently positioned to comfortably handle those dividend payments in both years.
Procter & Gamble should be worth $195 per share
Over the past two decades, Procter & Gamble has demonstrated a steadfast commitment to shareholders by elevating its dividend payment per share from $1.03 in 2002 to $3.68 in 2022, registering a compounded annual growth rate of 6.57%. Leveraging the Gordon Growth Model and assuming 6% dividend growth alongside an 8% discount rate, the intrinsic value of Procter & Gamble can be derived as follows:
P = Expected dividend for 2023 / (Required rate of return - Dividend growth rate)
= 3.68 *(1+6%) / (8%-6%)
= $195
This valuation positions Procter & Gamble's stock at $195 per share, marking a 30% appreciation from its present share price of $150.
Key takeaway
With its impressive 67-year track record of consecutive dividend hikes, Procter & Gamble is indeed a premier Dividend Aristocrat. The company's global dominance across its key business segments, robust balance sheet and consistent growth in revenue and earnings over the past two decades instill confidence in its ability to sustain dividend increases going forward. While the high payout ratios in 2015 and 2019 may raise concerns, a closer look reveals Procter & Gamble's prudent financial management and ample cash flows to support those dividend payments. With strong fundamentals and a current 30% undervaluation, the company remains a compelling investment choice for income-seeking investors focused on the long term.
