Portfolio diversification is critical for capital preservation and steady returns, and I am a firm believer in having a sub-portfolio of dividend stocks. Dividend stocks might not be among those names that give investors robust capital appreciation, but these names certainly provide stable dividends and are low beta stocks.
The Procter & Gamble Company (PG, Financial) is my dividend stock focus for this article, and the discussion will focus on dividend and buybacks coupled with the reasons to believe that strong fee cash flow will sustain for the company.
On April 8, Procter & Gamble announced that the company will increase quarterly dividends to 66.95 cents per share, and this translates into annual dividend of $2.68 per share and a dividend yield of 3.24% at current stock price of $81.8. Clearly, the dividends are robust and I expect continued annual increase in dividends as the company focuses on shareholder value creation through dividends and buybacks.
In the past year, Procter & Gamble's stock has remained sideways and I see an increase in dividends as a trigger for stock re-rating. While the stock trades at forward PE (June 2017) of 20, I don’t see these valuations as expensive considering the healthy dividend record and increasing buybacks. From a forward looking perspective, Procter & Gamble expects to return $70 billion to shareholders in the form of dividends and buybacks, and this is a major reason to be invested in this quality dividend stock.
In the past, there have been several examples where companies have pursued share buyback through issuing debt. For Procter & Gamble, I see the company’s healthy free cash flow as a big positive. For the second quarter 2016, Procter & Gamble reported FCF of $3.8 billion, with $1.9 billion and $2 billion being allocated towards dividend and share repurchase. Therefore, the company’s shareholder reward program has been largely in-line with free cash flows and I expect the company’s FCF to remain robust going forward.
In the near term, however, there are several concerns globally that can impact Procter & Gamble’s earnings. My view is that any stock decline on these concerns should be used to accumulate Procter & Gamble. I believe that currency volatility, slower growth in emerging Asia and geo-political worries are potential concerns with the first two factors likely to impact near-term earnings. This worry will be partially offset by the point that Procter & Gamble has also embarked on a cost savings program and the company expects nearly $1.2 billion in cost savings for 2016.
Another positive step that has yielded better results for Procter & Gamble is the company’s product portfolio transformation with the number of brands slimming down to 65 from an earlier 166 brands. With a more focused portfolio, Procter & Gamble has been successful in accelerating sales growth and I expect further growth traction once emerging markets see higher GDP growth. Among sub-segments, I see high growth potential for baby care products in China and India, where Procter & Gamble has a good market share in a prospective industry.
When looking at margins from a five-year perspective, I believe that the company’s super-premium and premium segment will deliver robust results. In the period 2005 to 2015, the company’s super-premium and premium products have growth at a CAGR of 130% and 118%.
In conclusion, Procter & Gamble is worth holding for long-term from a dividend perspective and returns through buybacks. While the near-term economic environment is challenging for all companies, I see Procter & Gamble navigating the challenge with ease.
Disclosure: No positions in the stock.
