Wednesday, June 3, 2015

Procter and Gamble (PG) Dividend Stock Analysis


Hello, this is Div4son,

Last month, I bought P&G a couple of times. This article captures my thought process.


Procter & Gamble Co. (P&G), is an American multinational consumer goods company founded by William Procter and James Gamble.
The company focuses on the following areas: Beauty Care; Baby, Feminine, and Family Care; Fabric and Home Care; Health and Grooming. It has world wide presence: Asia; Europe; India, the Middle East, and Africa (IMEA); Latin America & North America.


Last year, P&G announced it was streamlining the company, dropping around 100 brands and concentrating on the remaining 80 brands, which produced 95 percent of the company's profits.
In general, my basic DGI strategy is:


Good quality + high yield + high growth (+ time & patience)

This strategy follows the same framework as the SBI book.

I use a simple screen for stocks:

  • Yield over Avg Yield > 1.10
  • Yield > 2.5% (but less than 7%)
  • Payout Ratio < 0.8
  • Chowder > 10
Unfortunately, P&G typically does not pass my simple screen. It usually fails the Yield over Avg Yield since it is typically trading at a premium.

Moreover, the Chowder Rule is also slightly below the threshold as we can see below.


PG 5/31/2015AreaCriteriaCheckListComment
Quality Company
Dividend Growth>5 yearsYes58 years
ROE/EPS/Op MarginStableYesSee Chart
Long term Avg GrowthStableYes - but no for short termSee Chart; 7% growth from S&P Cap IQ
FCF over DividendsYesYesSee Chart
M* MoatWide MoatWideM* Wide
M* & S&P
Credit Rating
> BBB+YesS&P AA- M* AA
Cash to Debt & Interest Coverage, Debt to EquityCash Debt >1 or Interest Coverage > 5YesCash to Debt 0.41
Interest Coverage
Debt to Equity 21.56
M* & S&P Stars> 3 Stars for bothYesM* 4 Stars
S&P CapIQ 3 Stars A Quality
Payout Ratio<60%No0.69 Current Q
Dividend Growth
& Yield
Dividend Yield>3%Yes3.40%
Dividend Growth>5%Yes8.30%
Chowder>12%No11.7%
Valuation
Yield/Avg Yield>1.1No1.03
Dividend Yield Theory Mid PointBelow Mid PointYesMid Point 81.31
Low Point 70
DRRM~10%NoAssuming 7% growth; projected return=8.96%
M* Estimate<M* estYesM* 90
S&P Estimate< S&P cap IQ estYesS&P Cap IQ 85

However, P&G is one of those companies you would want to build up your portfolio with.


Quality analysis

Years of Dividend raises

P&G has 58 years of dividend raises.This is a excellent sign of stability of the underlying company and a good indication continued dividend raises.


Stability of key metrics

These ratios provide an indication of how wide the moat is. I am looking for overall stability (or even better - growth). If the ratios decline year over year, then this is an indication of moat reduction. I also compare these ratios with other companies within the same sectors.

As you can see, P&G is very stable with ROE and Operating margin in the 18-19% range almost every year.

 Free cash flow over dividends 


I use the free cash flow per share and compare this with dividends per share. FCF should cover the dividends. As you can see P&G's FCF YoY are covering the dividends. This is a good indication of future dividends.


Average growth 



Here, I look for the stability of growth indicators over ten years using the EPS and Revenue. From a ten year perspective, there is clearly growth. However, from 2010 until now, the revenue and EPS are essentially flat. 





The same trend is reflected on the 10yr and 3yr running averages. From a 10 year growth perspective, P&G looks okay.


But the 3yr averages are clearly not very good.

With lack of top-line growth, I think that this is forcing P&G management to execute $10B cost cutting plans to improve the bottom line.


M* Moat



I simply use the moat indicator from M* to validate my findings.  M* indicates that P&G has a wide moat. This is due to world wide P&G extensive brand recognition.


Credit rating



Here, I look for companies with credit rating of BBB+. Just like banks wanting good credit from you when you apply for a loan, you want companies which are stable from a credit perspective. 


P&G's credit rating from S&P is AA-. M* gives a rating of AA.





Debt



I look at the debt to equity ratio (<50) and cash to debt (<1) and interest coverage (>5). Sometimes, a little good debt is good for a business. But too much debt can be a burden. 
P&G's Cash to Debt 0.41 with Interest Coverageat around 51 which means the debt can be easily covered. The Debt to Equity is 21.56 which is way below the 50% threshold.
Over the years, the debt to equity ratio is well controlled.

M* and S&P capital IQ rating



I am looking for 3 stars and above from either. A four/five star is a bonus.  

M* gives P&G 4 Stars and S&P CapIQ gives 3 Stars with A quality company

I am seeing that if the combined M* & S&P Capital IQ stars is 7 or more, then this usually is a good indication to buy (if the company has good fundamentals). 

  P&G combined stars is 7 - which means it is a good indication to buy.




Dividend Yield and growth 

Dividend yield is 3.4% which is at my threshold of 3%.
5Y CAGR dividend growth is 8.30% which is higher my threshold of 5%
Chowder is 11.70 which is below my 12% threshold.

 As you can see, the dividend growth has decreased significantly in recent years. In some ways, this is the effect of low top-line growth.

Payout Ratio





The payout ratio for P&G  is around 69% for the current quarter which is slightly above the threshold of 60%.  The 2014 end of year numbers are close to the 60% threshold.



It looks like P&G is keeping the payout ratio within the 60% number - so I don't expect significant dividend growth in the near term.


Value analysis



Average yield



The current yield per average yield for 5 years ratio is 1.03. I use this as a quick indicator for valuation.This is no surprise, P&G is basically close to average value.



Dividend yield theory mid point



Using the dividend yield theory spreadsheet (based on the Dividends Don't Lie book), I calculate the mid and high points for the yield, from which I derive the price. 
Note: You can get the spreadsheet at: http://div4son.blogspot.com/2015/03/dividend-yield-theory-spreadsheet.html


I estimate the high yield and low yield to be 3.7 & 2.8 respectively.


This gives a mid point price of around $81, with a low price $70.

High Price:92.59
Mid Price:81.33
Low Price:70.07

Dividend Drill Return Model



Also, using the DDRM model per the Dividend Playbook, I try to estimate the total return. Using the growth information from above, I estimate a conservative  growth rate of 7% based on the 3yr EPS estimate from S&P Cap IQ report.


DDRM
Dividend Rate ($)2.67
Divided by: share price78.54
Current yield (%)3.40
Core Growth Estimate (%)7.00
Divided by: ROE (%)13.72
Multiplied by: EPS ($)3.15
Cost of Growth (%)1.61
Earnings per Share ($)3.15
Minus: Dividend2.67
Minus: Cost of Growth1.61
Funding Gap ($)-1.13
Divided by: Share Price ($)78.54
Share Change (%)-1.44
Core Growth (%)7.00
Plus: Share Change (%)-1.44
Total Dividend Growth (%)5.56
Plus: Dividend Yield (%)3.40
Projected Total Return (%)8.96

9% total return is under my 10% threshold.

Using the dividend growth:



Dividend Rate ($)2.67
Required Return (%)10.00
Growth (%)5.56
Price60.20

Using the 3 Yr Est EPS growth (S&P Cap IQ)

Dividend Rate ($)2.67
Required Return (%)10.00
Growth (%)7.00
Price89.01

Therefore, I estimate the fair price of around mid 70s. With the current price around $78, I think P&G is trading around the fair price range.

M* and S&P valuations

Morningstar gives P&G a target of $90. S&P capIQ gives a target of $84. Therefore, with a current price around $78, P&G is reasonably priced. 

Plus Points
  • P&G has a portfolio of leading brands across the household and personal-care areas.
  • P&G recently implemented a $10 billion cost-cutting initiative - which should greatly improve the bottom line.
Risks
  • P&G is having a difficult time to improve its top line growth.
  • P&G is suffering from the strong dollar

Conclusions
I think the P&G is an excellent company suffering from top-line growth. P&G management has implemented a $10B cost cutting measure that should help.


Overall, I think P&G is currently trading at fair value, and it is one of those companies that you want to build up your portfolio with.

In May, I added 2 more positions in P&G at ~$79 and ~$78. My P&G holdings (~80 shares) will provide me with $220 forward dividends. 

Since P&G is my largest holding in my portfolio, I will probably not add more in the near term and let my other positions catch up. (Eg UNP return in investment is almost 11% compared with P&G 9%!)

That's it for now. What do you think of P&G?

Div4son

2 comments:

  1. Div Son,

    Great job on picking up this Dividend King sub $80. We have made 2 purchases of PG recently as well with an average basis of $79.44. We feel that this a cornerstone holding in our portfolio and will continue to add more. Thank you for sharing your analysis and congrats on that added dividend income.

    All the best.

    FD

    ReplyDelete
    Replies
    1. Forward Dividends,
      Thanks for commenting. Mr. Market is providing more opportunities to get P&G today. I ended up adding more DEO, KO and PM since I am overloaded with P&G. It's funny how the market reacted to DEO after some buyout talks.
      D4S

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