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Proctor & Gamble: Still a Strong Play

March 27, 2012 | About:
Investing in a global company can be both beneficial and sometimes challenging. The performance of the company faces a cocktail of several unique factors which can result either in several unique benefits or in challenges. Procter & Gamble (PG) finds itself in this kind of situation and the investors have expressed different views on the company through their investment decisions. In order to determine the general position of Procter stock, we look at the various metrics that examine the value in investing in the stock including: dividend yield, payout ratio, dividend history, profitability, cash flows and competitors among others.

Analysts Synopsis on Procter stock

Procter has experienced a significant decline in profits over the last couple of years, including the most recent financial reports. This leads to decline in earnings per share, resulting in a higher price earnings ratio. The stock has a trailing dividend yield of 3.10% and a forward dividend yield of 3.20% presenting a healthy statistic for this stock.

The company’s dividend is growing consistently over the years since 1970, from an annual dividend yield of $0.05 per share to the present dividend of $0.53 per share. This is a great achievement for a long period as businesses face challenges that sometimes force them to pay lesser dividends.

Procter has a profit margin of about 12% and an operating margin of about 18%. Quite a small margin to work with but given the size of the company, this is quite a lot of money to reinvest in the company and pay dividends. The profits fell from over $13 billion to about $12 billion and then to a lower $11 billion over the last three years, a factor that could raise some skepticism amongst investors.

The company’s pay-out ratio of about 60% indicates a staunch commitment toward rewarding the stockholders and dividend growth over the years depicts, despite the decline in profits. The payout ratio is very sustainable and should not raise questions on how the company is going to cope, as the gearing ratio is very manageable, which is only at about 51.45.

Over the last two years, Procter reported a debit balance in net cash flows due to the 2010 huge debit balance. In 2011, Procter reported a credit balance that was overwhelmed by the debit balance which defined the existence of this debt.

Overview of Procter Direct Competitors

Procter has three direct competitors as reported in various media; two of them being publicly traded while the third one is a privately held company. Procter being a publicly traded stock faces competition from Johnson & Johnson (JNJ) and Kimberly-Clark (KMB). A third direct competitor, Unilever, a privately owned company, is also a concern for Procter.

Johnson has the best operating margin of about 25% compared to Procter operating margin of about 18%, while Kimberly comes in third with about 14% operating margin. This means that Kimberly has the lowest indirect costs compared to the rest, while Johnson has the highest indirect costs that are attached to individual products. The same applies to gross margin as Johnson leads the way with Kimberly closing the chapter.

Johnson has a better ability to meet its short-term maturing obligations, such as debt servicing as depicted by the EBITDA, followed by Procter. It has EBITDA of over $19 billion compared to that of Procter of about $18 billion. Therefore, Johnson creates a better impression to investors compared to Procter, however small. Kimberly this time around lags way behind with just over $3 billion in EBITDA.

Procter Downgraded by UBS

On January 30th 2012, Procter was downgraded from a buy position to a neutral. This event sends information to investors that tend to redirect their interest toward other stock of competitor companies, especially those looking to buy. However, for those who already hold the stock, this suggests a hold strategy for the investors, though there is a chance that many will sell the stock. Nevertheless, if this information is well spread within investors, then the ultimate course of action will be to hold the stock as no one will be willing to buy.

On February 23rd 2012, Procter was one of the participants in the consumer analyst group of New York in the annual conference. Taking into consideration that the company’s main income comes from consumer products, this is a great step ahead as Procter seeks to continue producing products, which satisfy consumer needs.

The Expected Dividend Yield in 2012

After having recorded a dividend yield of 3.10% in the last twelve months, the company will realize a dividend yield of 3.20% over the next twelve months. This is backed by the strong foundation of the company as a multinational. Despite recording reduced profits, dividend yield is still expected to grow as has been the trend over the years. The dividend is payable in four installments of $0.53 each in April, July, October and January of next year.

Analyst’s Objective Opinion on Procter Stock

The company has a strong foundation and the fundamentals remain attractive, despite the mixed results experienced in recent past. In as much as UBS, one of the most popular stock rating firms has downgraded the Procter stock from buy to neutral, this basically indicates a 50:50 situation which suggests that an investor may still buy the stock and gain from it. However, if we are to read from the actions of the investors following these sentiments, then the best option here would be to hold onto the stock as the dividends are still healthy and somewhat guaranteed.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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