Dividend Stock Wednesday: Procter & Gamble (PG)

Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks. This is not a recommendation to buy a stock – it is my analysis only. Please do your own research.

Looking at the image in this blog post that shows a number of Procter & Gamble products, I am amazed how many we use in my house. Tide, Crest, and Gillette – these are all household names that are global and brand recognized. I currently own PG in my portfolio, but have just downloaded the 2007 year end data and had another look at the stock. Here is my analysis.

Company Profile:
From MSN Money:

The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries. During the fiscal year ended June 30, 2007 (fiscal 2007), the Company was organized into three global business units: Beauty and Health, Household Care and Gillette GBU.

Revenue and EPS Graph

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Summary:

The revenue profile for PG is very consistent in its uptrend. The 10 year revenue growth rate is 7.6% and the last 5 years it has been the highest the company has seen in that period at 14.3%. Management has been very consistent in its ability to increase revenues from its core business units. The increase in sales within the last year is partially attributable to the integration of Gillette into the business. Revenue trends are looking good. As I typically do with such well established companies such as PG, I estimated revenue growth to be somewhere around the 10 year average as opposed to the more aggressive 5 year average – this helps provide some protection in my estimates. I have estimated revenue growth at 8% which means that revenues in 2011 are projected at $112,368 (m).

In a nutshell, PG earnings kick butt as well. The trend line is consistently up year after year – in fact over the past 10 years the company has never experienced a decline in earnings. Earnings growth over a 10 year, 5 year, and 1 year period is very consistent with rates of 10.4%, 10.8%, and 13.5% respectively. The slight bump in the last year is good to see, but it is not advisable to project earnings based on a limited amount of time. Given the consistent earnings growth of 10% I would like to project earnings out at 10%, but the fact that I only estimated revenues to grow at 8% I think I need to be more conservative. As such I am estimating PG to grow earnings at a rate of 8% over the next 5 years. My projected earnings per share amount in 2011 is $4.48.

One area of concern is PG’s Return on Equity (ROE) which significantly dropped in the 2006 and 2007. The company typically runs with an ROE of about 30% but it has dropped to approximately 15% in the last couple of years. It is higher in 2007 which is good, but I am going to keep an eye on this to ensure that it continues up, hopefully to its average of around 30%.

Dividends

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Summary:

Dividend growth has occurred every year for at least the past 10 years. The average historical dividend yield for this period is 1.9%. With the current yield at 1.9% the share valuation from a dividend yield perspective is about even. When I purchase a stock, I like to see current dividend yields higher than the 10 year average. In addition, the yield for PG is slightly lower than the yield on the S&P 500 Index, which is currently at 2.00%. I would rather see a stock’s dividend yield to be significantly higher than SPY’s.

Valuation

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Summary:

The stock selection guide allows an investor to come up with a valuation range for the stock based on historical prices, dividend returns, historical share price returns, and risk. It does this through formula that determines an upside and downside price (return / risk) for the stock. My inputs for the stock are as follows:

Revenue Growth Rate: 8%
EPS Growth Rate: 8%
Projected Upside P/E: 23.5
Dividend Return: 1.9%
Relative P/E: 0.95 (indicating the stock is slightly lower than historical averages)
Provision for a decline in the current stock price: 20%

Based on these inputs and the analysis completed by the software, my buy zone for the stock is $59.20 to $74.76. Given the current share price of $73.29 on December 4, 2007, I consider PG to be a buy. If my U.S. equity asset allocation were not bang on, I would consider adding to my position in PG.

For additional analysis on PG, you can also check out Value Line’s free report.

Disclosure: The Dividend Guy owns shares in PG. This is my analysis of the stock and is not investment advice. Do your own research.