Is This Dividend King a Monster Buy?

Procter & Gamble (NYSE:PG) is one of a tiny handful of dividend kings, S&P 500 stocks that have raised their dividends consecutively for 50 years or more. As such, the consumer staples giant is a favorite among income-oriented investors but is it a buy?

Procter & Gamble Revenue and Earnings

In the most recent quarter, Procter & Gamble reported revenue of $19.4 billion, up 7 percent from the previous year. Earnings rose to $1.33 per share from $1.26 in 2021. Both revenue and earnings beat analyst expectations. The consensus estimate for revenue was $18.7 billion, while earnings were projected at $1.29 per share.
P&G’s operating margin currently stands at 18.3 percent. While not particularly high, this is roughly in line with average margins over the past decade. Inflation and rising costs could impact margins, but the company has more than enough room to ride out these temporary macroeconomic factors.

Another very positive metric for P&G investors is the company’s free cash flow. Although down a bit from 2021 highs, the company has produced nearly $14 billion in free cash flow over the last 12 months. This has contributed to the company’s ability to repurchase over $11 billion worth of its stock, creating an additional reward for shareholders.

Procter & Gamble Dividend

Much of the appeal of Procter & Gamble stock lies in its exceptionally strong dividend history. As of the time of this wring, the stock yields 2.51 percent for an annual dividend of $3.65.
The company is also an undisputed top performer when it comes to increasing dividends over time. The most recent increase marked the 66th consecutive year in which P&G raised its annual payout.
Procter & Gamble also appears to be in a good position to continue raising its dividends going forward. The company’s payout ratio on a trailing 12-month basis is 58.9 percent, a sustainable level that leaves room for future dividend growth.
Given this and the company’s strong financial standing, there’s no reason to believe that P&G’s nearly 7-decade dividend increase streak will come to an end anytime soon.

Does Procter and Gamble Have a Moat?

As a leading producer of brand-name consumer staples, Procter & Gamble’s competitive moat comes down to name recognition and brand loyalty.
Luckily, P&G performs well in both of these categories, suggesting that its grip on the consumer products market is unlikely to weaken anytime soon.
There may be some competition around the edges from internet-based startups leveraging eCommerce, viral marketing and the agility that comes from being a small company. However, these cases are unlikely to eat into Procter & Gamble’s competitive moat in a meaningful way anytime soon.

Target Price and Valuation

P&G has a modest upside potential over the next 12 months compared to much of the rest of the market. Analyst price forecasts give the stock a median target of $170, up 15.5 percent against the current price of $147.01.
It’s worth noting, however, that P&G also hasn’t sold off quite as much as the broader market. YTD, the stock has lost 10 percent of its value, while the S&P 500 index is off by 13 percent.
As for value, Procter & Gamble doesn’t look especially cheap, but it also doesn’t appear to be overpriced. The stock trades at a forward P/E ratio of 25.2, in line with its industry. Price-to-book, however, is a bit high at 7.9. 
Running a discounted cash flow forecast (DCF) analysis on PG reveals upside to $164 per share, roughly in line with analysts’ projections.

Will Inflation Hurt Procter?

Inflation and rising material prices represent by far the biggest headwinds for P&G right now. These forces will increase production and transportation costs while also reducing consumer spending.
Although consumer staples stocks P&G are good hedges against inflation, rising prices can force consumers to explore generic alternatives to brand-name products.
Owing largely to price concerns, Procter & Gamble expects relatively low single-digit growth in FY2022. Given that inflation may persist through the rest of the year, there’s a decent chance that both earnings and revenue growth will remain at low levels for some time.

Is Procter & Gamble a Buy?

Procter & Gamble is a safe and solid investment that comes with reasonably low levels of risk. With 66 years of consecutive dividend increases, the company has more than proven its commitment to rewarding shareholders through dividend income. The payout ratio P&G currently maintains should allow it to continue this streak with little to no difficulty.
It’s also worth considering that a recession could be coming in the near future. P&G has successfully ridden out market conditions ranging from the stagflation of the 1970s to the financial crisis of 2008, raising its dividend annually the entire time. Procter & Gamble is largely recession-proof and will likely have no difficulty surviving a post-COVID recession.
With that said, P&G isn’t a high-growth company. Even after it breaks out of its current slow period, the company is likely too mature to compound at double-digit rates for any sustained period of time. Investors can expect share price growth, but it will not be as rapid as other types of stocks deliver.
Procter & Gamble also isn’t particularly cheap right now. To all appearances, the stock trades at a fair value. Value investors searching out significantly underpriced assets, however, likely won’t find P&G particularly attractive.
For investors who are looking to add an income-generating dividend king to their portfolios, though, Procter & Gamble truly could be considered a monster buy. With consistent dividend increases and prudent reinvestment, P&G has the potential to help investors build wealth steadily over the long term.
The power of P&G can clearly be seen when tracking performance during the past 30 years with dividend reinvestment. Over this time, the stock has handily outperformed the S&P 500. If you’re looking for a solid buy-and-hold income stock, Procter & Gamble is a great option to consider while the stock remains somewhat sold off.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.