After publishing Clorox (CLX) & Colgate-Palmolive (CL) analyses, I’m going to take a look at another great dividend stock: Procter & Gamble (PG).

 

Procter & Gamble (PG) Business Description:

 

Founded more than 100 years ago (1837), Procter & Gamble is one of the largest and best known companies in the world. PG operates in over 180 countries and they have divided their widely diversified operations into 5 divisions:

 

Beauty (Head & Shoulders, Olay, Dolce & Gabbana, Gucci & Hugo Boss fragrance)

Grooming  (Braun, Gillette)

Health Care (Always, Crest, Oral-B, Vicks)

Fabric Care & Home Care (Dawn, Duracell, Febreze, Gain, Iams, Tide)

Baby Care  & Family Care (Bounty, Charmin, Pampers)

 

PG product diversification

 

As you can see, one of PG’s huge strengths is the individual star power commanded by many of their brands. Without knowing, everybody has at least one PG product in their household. They claim to have 24 individual brands selling over 1 billion each. A total of 50 brands generate 90% of their sales & profits. If you are looking for a diversified company, I think you will find a good one in Procter & Gamble! The beauty of most of their products is also that we need them regardless if we make a lot of money or not (who would skip on toilet paper anyways?).

 

P&G operates in several countries and have a great mix of developed (65%) and developing markets (35%). While they are well established in North America where their main market is, they are also making an important part of their profits overseas as shown in this graphic:

PG geographical diversification

 

As is the case with Clorox & Colgate-Palmolive, Procter & Gamble puts a lot of emphasis on sustainability in their socially responsible reports. I found it interesting that they have been tracking their progress since 2002. They now have 10 years under their belt to prove that they are a sustainable company. They have cut roughly 50% and more of their energy, CO2 emission, water usage and waste since 2002. Since the company is selling more than it used to be back in 2002, we can say that it’s quite a feat (or that they used to waste a lot of water back then!). They are part of several socially responsible indexes (FTSE4Good, DJSI and the top 100 world most sustainable company). PG also focuses a lot on sustainability product innovation. I think they understood that the future of a company like theirs is directly linked to the creation of more sustainable & green products. The population is consuming a lot but natural resources are limited, it’s about time that we understand this concept!

 

PG Stock Graph

 PG Stock Graph

PG Dividend Growth Graph

 PG DIVIDEND GROWTH

PG, along with many other consumer product businesses, has focused on dividend growth over the past 5 years. They show an important and steady dividend increase over this period. However, I have a few concerns with regards to the sustainability of such high dividend growth for the years to come. You’ll understand why after looking at the financial ratios. However, they show 56 consecutive years with a dividend increase. I guess we can call this stock a Dividend Growth Stock!

 

Procter & Gamble Ratios and Financial Info:

 

Ticker
PG
NameProcter & Gamble Co/The
Dividend Metrics
Current Dividend Yield3.29
5 year Dividend Growth10.49
1 year Dividend Growth7.97
Company Metrics
Sales Growth (1 year)1.36
Sales Growth (5 year)1.35
EPS growth (5 year)15.37
P/E ratio18.37
P/E Next Year16.23
Margins growth-1.06
Payout ratio66.06
Return on Equity16.32
Debt to Capital Ratio0.16

 

 

Look at the following two graphs and tell me what is wrong with P&G:

PG EPS

 

PG NET SALES

If the earnings per share are quite stable and then drop while the net sales are on an uptrend from 2009 to 2012, what happens? Margins are under pressure! Procter & Gamble is definitely under profitability pressure. In order to find out more info, I’ve gone through their financial statements to see what went wrong in 2012. They always find a positive way to present the EPS and talked about core earnings per share being $3.85 (including $0.54/share of discontinued operations) and relate the drop in earnings due to raw material costs, tax rates and increased investment in developed markets.

 

Going deeper into the financial statements, I’ve discovered more info. The EPS decreased is due to:

 

PG EPS EXPLANATION

 

In order words; impairments + margin pressure partially saved by the sale of snack business (Pringles) (note to myself; P&G won’t be making those delicious chips and making profit from it next year).

 

 

PG Stock Technical Analysis

 

 PG technical analysis

 

 

PG is currently trading on a strong uptrend. It might be a good time to add this stock. Click here to get a free stock analysis report on PG.

 

Procter & Gamble Upcoming opportunities and dangers:

 

You can tell that P&G knows that their margins are under pressure as they announced a $10 Billion productivity plan back in February. They will focus on innovation and productivity in the upcoming years. While this sounds like a good plan, it may also become a big hole where they shovel billions of dollars. You always have to be cautious with such “productivity” improvements!

 

Going back to this margin pressure issue, it seems that the impairment charges along with the restructuration (for more productivity) are one time costs and P&G expects EPS to go higher than $4 in 2013. I was a bit worried when I saw the EPS going down but now that I’ve found an explanation, it seems that P&G doesn’t have much for me to worry about.

 

Sure competition will be there but Procter & Gamble has the biggest budget in R&D and improvement amongst its competitors. This should keep their leader’s position seat warm and fuzzy for the future. On the other hand, a relatively high P/E ratio is a sign that PG is not a deal right now but rather a good dividend growth stock to hold in your portfolio.

 

Final Thoughts on Procter & Gamble

 

I like what I see in P&G but I’m not too excited either. In fact, the company has been doing well over the past years but it hasn’t been doing amazing. P&G seems a logical choice for anyone who wants to add some safe & steady dividend growth stock to his portfolio. At this stage, there is more to expect from the dividend than from the actual growth of the company.

 

Disclaimer: I do not hold PG in my portfolio

 

 

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5 Comments   |  

5 Comments

October 17, 2012, 11:09 am

I agree with your opinion on the stock. I recently did an analysis on PG and came to a similar conclusion. I’m not excited by the recent flat trend of EPS and income. Also the stock is trading at a higher P/E ratio right now. Not exactly sure why the market is valuing them so highly. I think currently you would be better served to look elsewhere.

October 17, 2012, 9:53 pm

A lot of analysts do not like Proctor & Gamble right now with good reason. Their margins are decreasing, brand recognition deteriorating, along with inflation around the corner. However, with all that said, this company has a very long and successful track record of surviving recessions and economic turmoil in America. You will hardly ever hear me say or suggest you purchase a stock based on its history. In this case though I am making an exception and hoping for a sizable correction/drop in the PG stock price.

October 18, 2012, 1:46 pm

Hi,

I came across this website by chance after doing some research about P&G. You do some thorough analysis! I’m impressed by the work you do.

However, I have a question, if you have the time to answer: If inflation picks up, which I think it will, how hurt will P&G get? I think they will have a hard time increasing prices. Could the already flattening be because of “hidden” inflation?

October 27, 2012, 11:42 am

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November 5, 2012, 5:01 am

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