The Procter & Gamble Co. (PG, Financial) recently announced a 5% dividend increase. While the size of the increase isn’t all that noteworthy, it does extend the company’s dividend growth streak to 66 consecutive years.
This is one of the longest dividend growth streaks in the market place, which is why Procter & Gamble is such a mainstay in many dividend growth portfolios.
The length of the growth streak is impressive, but investors should always have an eye toward the future if they are relying on dividends to fund retirement.
I will examine Procter & Gamble’s business, recession performance and evaluate its ability to continue to pay and raise dividends going forward.
Company background and results history
Procter & Gamble has been in business since the 1830s and has grown to become one of the largest consumer staple companies in the world. The company has undergone an extensive paring down of non-core brands in recent years as it now focuses on 65 key brands.
The $382 billion company has a variety of well-known and trusted brands, such as Bounty, Crest, Dawn, Gain, Gillette, Luvs, Olay, Oral-B and Pampers, among others. The focus on key brands has paid off for Procter & Gamble as the company has seen year-over-year revenue growth in every quarter since the second quarter of fiscal 2017. The company generates annual revenue of $76 billion.
According to Value Line, Procter & Gamble’s annual revenue has decreased 1% annually over the last decade, but this is a misleading figure as it includes brands that were divested in the recent restructuring. Revenue has a compound annual growth rate of 4% per year over the past five years. According to analysts, Procter & Gamble is expected to see 4.2% revenue growth in fiscal year 2022 as the company looks to continue its medium-term top-line trend.
Bottom-line performance has been much better over the past decade. Earnings per share had a CAGR of 4.4% over this period, while net profit improved 2.9%. A small reduction in the share count aided earnings growth, but the company saw its net profit margin improve from 13.6% in 2012 to 19.4% in 2021, an impressive result for consumer staple.
Looking at just the last five years, the growth rates are even more eye-opening. Earnings per share and net profit have a CAGR of 9.6% and 8.2% as the net profit margin increased 290 basis points during this period as Procter & Gamble’s focus on core bands has led to strong performance.
Dividend growth history and recession performance
Procter & Gamble’s most recent raise, though lower than the prior year’s 10% increase, is just above the 10-year average raise of 4.7%.
The company's dividend growth streak has reached into its sixth decade because it offers brands that resonate with consumers. This has allowed the company to perform well against difficult economic backdrops.
Consumer staple companies are often lauded for their slow but steady growth as they offer products that consumers require even in recessionary environments. Procter & Gamble is no different. Below are the company’s adjusted earnings per share totals prior, during and after the 2007 to 2009 recession:
- 2006 adjusted earnings per share: $2.64
- 2007 adjusted earnings per share: $3.04 (15.2% increase)
- 2008 adjusted earnings per share: $3.64 (19.7% increase)
- 2009 adjusted earnings per share: $3.58 (1.6% decrease)
- 2010 adjusted earnings per share: $3.53 (1.4% decrease)
- 2011 adjusted earnings per share: $3.93 (11.3% increase)
- 2012 adjusted earnings per share: $3.85 (2% decrease)
- 2013 adjusted earnings per share: $4.05 (4.2% increase)
As you can see, Procter & Gamble performed well during the first part of the Great Recession as earnings grew by double digits in both 2007 and 2008. The next two years saw just small declines as the company navigated the recession relatively unscathed. Procter & Gamble established a new high for adjusted earnings per share by 2011 and growth has generally been in an uptrend ever since.
The dividend not only grew during this period, but doubled between 2006 and 2013, speaking to the quality of the company and its ability to reward shareholders. Procter & Gamble yields 2.3% at the moment, which compares favorably to the average yield of 1.3% for the S&P 500 Index.
Payout ratio's impact on future dividend growth
Past performance doesn’t always equal future success, so it is vital that investors understand the company’s ability to pay future dividends.
Procter & Gamble distributed $3.24 in dividends per share in 2021. The company’s earnings per share totaled $5.66 for the year, resulting in an earnings payout ratio of 57%. The 10-year average payout ratio is 62%.
Shareholders will receive $3.52 in dividends per share in 2022. The company is forecasted to earn $5.86 per share this fiscal year, equating to a projected payout ratio of 60%. Both last year and this year’s payout ratios are below the long-term average.
Turning to free cash flow, Procter & Gamble distributed $8.6 billion of dividends over the last four quarters. During that same period, the company has generated free cash flow of $14.9 billion for a payout ratio of 58%. This matches the average free cash flow payout ratio for the past four years.
Both the earnings and free cash flow payout ratios are reasonable and either match or are below the recent averages. This means that Procter & Gamble’s dividend is likely safe based on either metric.
The impact of debt on dividend security
The payout ratios are healthy, but what impact could debt have on Procter & Gamble’s future ability to raise its dividend?
Procter & Gamble’s interest expense totaled $438 million over the last year. The company’s debt stood at $35.7 billion as of the most recent quarter, giving it a weighted average interest rate of just 1.2%.
The following image shows where Procter & Gamble’s weighted average interest rate would need to reach where free cash flow wasn’t sufficient enough to cover dividend payments.
Source: Author’s calculations.
As you can see, Procter & Gamble’s weighted average interest rate would need to reach 19% before dividends weren’t covered by free cash flow. With the current average weighted at just over 1%, the dividend should be considered safe from a debt perspective as it would take a massive increase in interest expense to impact future payments.
Final thoughts
Procter & Gamble has one of the longest dividend growth streaks in the market as the company has weathered multiple recessions. Its brands are trusted by consumers, which continue to purchase these products even under challenging economic conditions.
The company has very reasonable payout ratios and extremely manageable debt obligations that likely mean Procter & Gamble will continue to raise its dividend for years to come. This suggests investors looking for a top dividend-paying name in the consumer staples space could consider adding Procter & Gamble to their portfolio.
