Published by Bob Ciura on April 28th, 2017
Procter & Gamble (PG) is a rare stock, because of its tremendous dividend history.
It is one of just 51 stocks on the list of Dividend Aristocrats, companies with 25+ consecutive years of dividend increases.
You can see the entire list of Dividend Aristocrats here.
Not only is it a Dividend Aristocrat, it is also one of only 19 Dividend Kings—these are stocks with 50+ years of dividend increases.
To see the complete list of Dividend Kings, click here.
P&G has paid a dividend for more than 120 years, and has raised it each year for six decades running.
Over that period, every so often P&G has had to re-invent itself. This is one of those times—P&G is in the process of a major portfolio restructuring.
The company is slimming down, to become more efficient, and position itself to return to growth.
The turnaround is gaining momentum. On Wednesday, April 26, P&G released fiscal third-quarter earnings, which showed its turnaround remains on track.
Quarterly Performance Overview
A quick rundown of P&G’s results from its fiscal third quarter:
- Revenue: $15.61 billion (down 1% year-over-year)
- Earnings-per-share: $0.96 per share as adjusted (up 12% year-over-year)
These results were mixed, in terms of analyst expectations. Earnings-per-share beat estimates by $0.02 per share, while quarterly revenue fell short by approximately $120 million.
Last quarter represented the strongest earnings growth rate for P&G over the past five quarters.
Source: Q3 Earnings Presentation, page 4
P&G generated strong earnings growth for the quarter, thanks to improved efficiency.
One factor that held P&G back last quarter, was unfavorable foreign exchange. The strong U.S. dollar has negatively impacted revenue growth for companies that have high levels of international exposure, such as P&G.
P&G sells its products in more than 180 countries around the world. More than half of P&G’s sales in fiscal 2016 were conducted outside North America.
A stronger U.S. dollar, relative to international currencies, makes exports less competitive with locally-produced goods.
Source: 2016 Fact Sheet, page 1
Foreign exchange caused P&G’s net sales to decline 1% for the quarter. But organic sales, which excludes the impact of currency and divestitures, increased 1% last quarter.
P&G realized organic sales growth in four out of its five segments, led by health care, up 6% for the quarter.
The health care product segment generated 12% earnings growth last quarter, or 14% growth excluding the impact of currency fluctuations.
Growth was due to a combination of favorable pricing and product mix. And, developing markets outperformed developed markets.
Source: Q3 Earnings Presentation, page 11
The worst performing segment last quarter was grooming, which posted a 6% organic sales decline last quarter.
P&G’s grooming segment is anchored by its flagship Gillette brand. Premium-priced shaving products are under pressure from upstart competitors like Dollar Shave Club, which Unilever (UL) acquired last year for $1 billion.
Outside grooming, P&G’s growth shows that its turnaround is working.
And, even though P&G’s international exposure is hurting the company now, it should be a benefit to the company over the long-term. P&G generates roughly two-thirds of its sales from under-developed markets.
Emerging economies are growing at a faster rate than mature markets like the U.S., and have led P&G’s growth throughout fiscal 2017.
Sales in developing markets rose 5% in the first half, and increased 4% last quarter. By contrast, the U.S.—P&G’s largest market—had sales growth of 2% in the first half, but were up less than 1% last quarter.
Growth Prospects
P&G’s double-digit earnings growth is the by-product of the company’s major portfolio restructuring.
Now that its divestment period is over, P&G will focus on approximately 65 brands, encompassing 10 product categories.
Source: 2016 Fact Sheet, page 2
As a result, the ‘new’ P&G will be led by its core brands going forward.
A sample of its biggest brands includes:
- Bounty
- Charmin
- Crest
- Downy
- Febreze
- Gain
- Gillette
- Head & Shoulders
- Olay
- Pampers
- Tide
In 2016, P&G completed major asset sales. It sold off dozens of brands which were deemed non-critical to its future strategy.
A few of its major asset sales include:
- Duracell battery business sold to Warren Buffett’s Berkshire Hathaway (BRK-A) for $4.7 billion.
- 43 beauty brands sold to Coty (COTY) for $12.5 billion.
When P&G made these transformative deals, its reasoning was that they were low-growth brands, which weighed the company down.
By selling them off, P&G could raise billions of dollars, which it used for share repurchases and investments in product innovation in its remaining core brands.
These efforts are working well, judging by its third-quarter earnings growth. For the full fiscal year, P&G expects mid-single digit growth in adjusted earnings-per-share.
And, P&G removed $10 billion from its cost structure. Selling, general and administrative expense, as a percentage of overall revenue, fell by 40 basis points from the same quarter last year.
P&G’s improved efficiency should strengthen its cash flow generation, which supports its annual dividend increases.
Dividend Analysis
Last quarter, P&G had adjusted free cash flow of $2.3 billion. It utilized $1.8 billion for dividends.
For 2017, P&G expects to pay shareholder dividends of over $7 billion.
P&G’s dividend is one of the most compelling reasons to own the stock. P&G has a 3.1% dividend yield, which his significantly above the average stock in the S&P 500 Index.
Even better, P&G has paid a dividend for 127 years, since its incorporation in 1890. And, it has raised its dividend for 61 years in a row.
Its remarkable consistency demonstrates the power of P&G’s brands, and the company’s durable competitive advantages.
It has continued to raise its dividend payout each year, in good times and bad. Its most recent increase was a 3% hike.
After the dividend raise, P&G’s annualized payout is approximately $2.76 per share. The company generated core earnings-per-share of $3.76 per share in fiscal 2016.
As a result, P&G’s payout ratio based on 2016 earnings-per-share, is 73%. This is a fairly tight payout ratio, which explains P&G’s low dividend growth rate over the past few years.
That said, the company’s turnaround has provided it with accelerating earnings growth. If this continues, P&G could improve upon its dividend growth in 2018 and beyond.
Final Thoughts
P&G’s sales growth disappointed last quarter, mostly due to foreign exchange. More importantly, P&G’s turnaround remains on track.
Sales are growing in organic terms, and its portfolio restructuring has led to double-digit earnings growth.
This is clear evidence that P&G’s turnaround plan is working. Assuming the company’s recovery continues, investors may see higher dividend growth from P&G next year.
- To see how P&G’s dividend compares with another Dividend King—Colgate-Palmolive (CL)—click here.
- For a head-to-head matchup of two more dividend stocks in the consumer staples sector, click here.
