As I look around my house I have identified at least 5 products that are distributed by Procter & Gamble. A few posts ago I started a series of posts on the various dividend stocks I hold, starting with Johnson & Johnson. Today I am going to have a look at Procter & Gamble (PG).[ad#tdg-embedded]
Why I Continue to Hold PG
PG has a number of things going for it that continue to make it a good investment for me still. Here are four reasons I like and will continue to hold the stock:
1. 55 Years of Dividend Increases
Proctor & Gamble has been paying out dividends since 1891, and has increased its dividend payout each year for the last 55 years. It is that last 55 years that I am most interested in – that provides excellent compounding growth.
2. Focused on Improving Earnings Per Share
In 2009 PG made $3.60 in EPS, which was down slightly from the $3.64 it posted in 2008. Not a big drop, but when I buy a stock I look to make initial purchases only in companies with long track records of growing EPS. However, since I already was a shareholder I did not sell. That being said I am encouraged by the actions management has taken to address the problems:
* Focus on coast-savings projects within the company
* Cleaning up the portfolio (i.e. sold Folgers)
3. Debt-to-Capital is Below 45%
The company continues to manage its finances in a fiscal manner by managing its debt load. It has been able to grow without the huge burden additional debt can provide.
4. Very Strong Cash Flow Per Share
PG is a company that throws off cash like crazy. This metric means the company is making more than enough money to cover its obligations. In other words, it is able to pay all its bills. Companies go bankrupt because they cannot pay all their bills so as an investor I look for a high level of FCF.
What Are the Risks with PG
Every stock has weaknesses, and despite the positive aspects covered above, there are some risks that come with owning PG.
1. Slow Stock Growth
Many behemoth companies like PG tend to have slow growing share prices. PG is no exception. If you are looking for a stock that is going to double quickly then PG is not for you. However, the consistent performance cannot be overlooked and personally I believe that the share price will reflect that once again.
?2. To Grow it Needs to Invest in Riskier Markets
To help grow the company, the company has had to look outside of its traditional markets and start to look at emerging and developing markets. This can be risky for a company. The company’s FCF and strong management will help the process, however if it is not done cautiously and deliberately it can create huge problems. I will be watching how PG does on this front in the coming years.
The Bottom Line
It is easy to get seduced into buying PG because of its dividend growth. However, as an investor I hold the stock for many more reasons than that. A good management team and the flexibility afforded by strong cash flow also make this a strong company.
Regards of the risks that come with owning the company, I personally will continue to hold and let those dividends compound in my account.
P.S. Over at Dividend Value, D4L has given PG a four-star rating in his Premium Content. I am a subscriber.