Will Procter & Gamble Raise Dividend in 2017?

With restructuring complete, investors can expect hikes to exceed last 2 years

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Feb 22, 2017
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(Published Feb. 22 by Bob Ciura)

Procter & Gamble (PG, Financial) is quite simply one of the most legendary dividend growth companies of all time.

The stock has paid dividends for more than 120 years, and it has increased its dividend for 60 years in a row.

Procter & Gamble is one of just 19 Dividend Kings, a select group of companies with 50-plus years of consecutive dividend increases.

You can see the entire list of Dividend Kings here.

Procter & Gamble’s dividend growth hit a speed bump in the last two years, as the company underwent a massive restructuring.

Since Procter & Gamble is such an enormous company – it has a market capitalization of more than $230 billion – it needed time to see its turnaround efforts materialize.

But now that its restructuring is complete, the company is looking forward to accelerating earnings growth this year and beyond.

As a result, there is good reason for investors to expect Procter & Gamble’s 2017 dividend increase to exceed its 2015 and 2016 dividend hikes.

Business overview

Procter & Gamble has a balanced business model. It operates five segments and generates more than one-third of its total sales from emerging markets.

02May2017132422.jpg?resize=710%2C176

Source: 2016 Annual Report, page 2

Going forward, Procter & Gamble will focus on 10 core categories, which encompass roughly 65 brands.

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Source: Company Fact Sheet, page 2

One challenge that remains is a sluggish revenue growth rate. The dozens of businesses Procter & Gamble sold off over the past few years will result in lost revenue, and Procter & Gamble is still grappling with the strong U.S. dollar.

These factors caused Procter & Gamble’s net sales to fall by 8% in 2016. The weak sales figures came after a 5% drop in sales in 2015.

With these declines, it is easy to write off Procter & Gamble’s turnaround as unsuccessful, but this would be misguided.

The brands Procter & Gamble sold were low-growth brands. The trade-off is that Procter & Gamble has shifted its portfolio toward higher-value products.

The remaining core brands generate higher margins, which means earnings per share should continue to grow.

This was on full display in fiscal 2016. While sales fell, operating cash flow rose 5.5% to $15.4 billion, the highest level in the past five fiscal years.

Going forward, investors should keep their focus on earnings-per-share growth, which is key for Procter & Gamble’s dividend growth prospects.

Growth prospects

Procter & Gamble’s massive asset sales allowed it to emphasize efficiency through higher productivity.

In the past five years the company exceeded $10 billion in cost savings across cost of goods sold, marketing and overhead.

Procter & Gamble’s massive cost cuts have had a significant impact on margins. In fiscal 2016, operating margin based on continuing operations expanded by 370 basis points, to 15.4%Â –Â marking the highest level in the past five years.

The company is not done – Procter & Gamble believes it can deliver up to $10 billion in additional productivity improvements over the next five years.

In addition to cost cuts, share buybacks will be a driver of future earnings growth.

The billions of dollars Procter & Gamble raised through the asset divestments can be utilized for share repurchases. For example, Procter & Gamble expects to utilize $9.4 billion from the sale of its beauty brands portfolio to Coty (COTY, Financial) for share repurchases in 2017.

These trends are fueling strong results in fiscal 2017.

Last quarter, currency-neutral core earnings per share – which excludes restructuring costs, divestment gains and foreign exchange – increased 9% year over year.

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Source: Q2 FY17 Presentation, page 5

Operating profit margin expanded another 60 basis points during the quarter.

The top two performing segments for Procter & Gamble last quarter were grooming and health care, which grew core earnings per share by 10% and 13%.

The grooming segment benefited from volume growth due to product innovation and price increases. Higher prices were particularly beneficial in the emerging markets where sales of Procter & Gamble’s grooming products rose by double digits.

02May2017132424.jpg?resize=710%2C409

Source: Q2 FY17 Presentation, page 9

Meanwhile, the health care segment was boosted by higher pricing and a favorable shift in product mix.

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Source: Q2 FY17 Presentation, page 11

For the full fiscal year, Procter & Gamble management expects core earnings per share will rise at a midsingle-digit pace from fiscal 2016.

This will be more than enough to justify a dividend increase in 2017.

Thanks to its accelerating earnings and operating cash flow growth, there is a good chance Procter & Gamble’s dividend growth rate could accelerate as well.

Dividend analysis

Procter & Gamble has endured some difficult years. For most companies, this would normally call into question its ability to continue raising dividends in the face of a difficult operating climate.

But Procter & Gamble is no typical company.

It has a long track record of making reliable dividend payments to shareholders through good times and bad. In fact, 2017 represents Procter & Gamble’s 127th year of paying dividends.

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Source: Company Fact Sheet, page 2

Procter & Gamble has proven the ability to navigate downturns and continue increasing its dividend. It has raised its dividend for six decades, and it isn’t about to stop now.

Even better, Procter & Gamble could pass along a higher dividend increase than it has in recent years.

Investors could not be blamed for being disappointed with Procter & Gamble’s last few dividend increases. For example, in 2015 the company gave investors a 3% dividend increase.

Last year, Procter & Gamble bumped up its dividend by just 1.1%.

The reason for this was that Procter & Gamble management felt compelled to be cautious with the dividend raise so as not to overextend the company’s financial position and endanger its turnaround.

In fiscal 2016, the company generated core earnings per share of $3.67. The current annualized dividend is $2.68 per share.

Assuming a 4% to 6% earnings growth rate in 2017, which would be in line with management’s forecast, earnings per share could conceivably rise to roughly $3.82 to $3.89 in fiscal 2017.

At the midpoint of that range, Procter & Gamble’s payout ratio is roughly 70%, based on its current dividend.

That remains slightly higher than its historical average, which has remained around two-thirds of earnings per share.

But it’s still reasonable for investors to expect a 3% to 5% dividend raise. This would not lift the payout ratio much and would represent a dividend hike that at least beats inflation – unlike the 2016 raise.

Final thoughts

The Dividend Kings are a rare breed and have been among the most rewarding dividend growth stocks in history.

Procter & Gamble has earned this distinction with six decades of dividend growth under its belt.

While its turnaround has been a long and difficult process, there is a light at the end of the tunnel. Procter & Gamble has emerged from its restructuring as a slimmer, more efficient company.

Now that Procter & Gamble is growing earnings again, investors should look forward to a higher dividend increase from Procter & Gamble this year than in years past.

Disclosure: I am not long any of the stocks mentioned in this article.

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