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Dividend Aristocrats in Focus Part 41: Procter & Gamble

1 of America's most successful companies was founded by immigrants

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Ben Reynolds
Nov 14, 2016
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Procter & Gamble (

PG, Financial) is one of the most impressive success stories in the history of America, but the company was actually founded by two immigrants.

P&G was founded by William Procter, an immigrant from England, and James Gamble, an immigrant from Ireland.

Ironically, they might have never met had they not married sisters — Olivia and Elizabeth Norris.

When they immigrated to the U.S., Procter started a candle-making shop. At the same time, Gamble became a soap maker.

Their father-in-law noticed that the two competed with each other for raw materials. He suggested they go into business together, and so they did. What started out as a simple candle and soap making shop in Cincinnati eventually turned into one of the largest companies in the world.

P&G is a Dividend Aristocrat. It has raised its dividend for 60 years in a row. You can see the entire list of Dividend Aristocrats by clicking here.

Business overview

Procter & Gamble is a giant consumer staples company. It has been in business for 178 years, operates across 180 countries and generates $70 billion in annual sales.

It sells a wide range of household products, from laundry detergent to paper towels to diapers and everything in between. Its products are organized into five core segments:


Source: 2016 Annual Report, page 2

Business conditions for P&G are challenged. In the U.S., the company is being hit by weakness across some underperforming brands. Overseas, it is being weighed down by the strong U.S. dollar.

P&G is a global company. It generates approximately 56% of its net sales from outside North America.


Source: Source: 2016 Annual Report, page 2

Because of the rising U.S. dollar, P&G’s net sales were reduced by 6% last year. This caused overall net sales to decline 8%.

These challenges have caused a prolonged slowdown for P&G. Earnings per share declined 5% over the past five fiscal years.

Growth prospects

In response to its declining earnings, P&G is resorting to significant asset sales to restore growth. The company is planning a major restructuring, whereby it will slim down the number of brands in its portfolio. It is hoping this helps it to become nimbler and more flexible.

For example, in 2014 P&G sold the Duracell battery business to

Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.B, Financial) for $4.7 billion.

Separately, P&G sold a collection of 43 beauty brands, including Dolce & Gabbana, Gucci, Hugo Boss (

BOSS, Financial), Cover Girl, Max Factor and Wella, to Coty (COTY, Financial) for $12.5 billion.

These asset sales are part of a much bigger strategy. Eventually, P&G sees itself selling as many as 100 brands.

The company will largely use the proceeds to buy back stock. This should provide a meaningful boost to earnings-per-share growth.

Another of P&G’s growth catalysts is entry into new geographic markets. The company currently generates nearly two-thirds of its sales from developed markets, but this stands to change moving forward.


Source: 2016 Annual Report, page 2

P&G’s earnings-per-share growth will benefit from margin expansion. P&G has announced a major round of cost cuts.

The company seeks to cut costs by $10 billion over the next five years, primarily through job reductions. P&G cut more than 20,000 jobs since 2012.

Competitive advantages and recession performance

P&G’s biggest competitive advantage is its brand strength. The company has a portfolio of very popular brands that command high market share. It has 20 brands that each generate at least $1 billion per year in annual revenue.

Another competitive advantage is scale. Because it is such a huge company, P&G has plenty of flexibility to squeeze out costs, which boosts margins. For example, P&G realized $10 billion of cost savings over the past five years across cost of goods sold, marketing spend and overhead.

It believes there are still avenues to increase efficiencies. P&G management believes it can generate another $10 billion of savings, largely from reductions in raw materials and overhead, over the next five years.

P&G’s earnings per share each year through the Great Recession of 2007-2009 and the economic recovery is shown below:

  • 2007 earnings per share of $3.04.
  • 2008 earnings per share of $3.64 (20% growth).
  • 2009 earnings per share of $3.58 (2% decline).
  • 2010 earnings per share of $3.53 (1% decline, recession low).
  • 2011 earnings per share of $3.93 (11% growth, new high).

The beauty of P&G’s business model is that it sells products that are used every day in millions of households around the world. These are products that people cannot do without, and they are products that are not vulnerable to technological disruption.

It is not likely that paper towels, toothpaste and toilet paper will become obsolete because of technology. That provides a solid floor underneath P&G’s earnings per share. This is why the company has maintained its dividend for more than a century and will likely continue paying its dividend for the next century.

Valuation and expected total return

P&G stock trades for an adjusted price-earnings (P/E) ratio of around 20. The stock is cheaper than the Standard & Poor's 500, which trades for a P/E ratio of around 25.

At the same time, since 2000 P&G stock traded for an average P/E ratio of 16. From that perspective, the stock appears to be fairly valued or slightly overvalued based on its historical average valuation.

Moving forward, P&G’s total shareholder returns may be as follows:

  • 3% to 5% organic revenue growth.
  • 2% margin expansion.
  • 2% share repurchases.
  • 3% dividend.

Therefore, investors can reasonably expect to earn 10% to 12% total returns.

Final thoughts

P&G is not performing well right now. But one thing that is not to be questioned is P&G’s dividend. P&G has been paying a dividend for 126 consecutive years, ever since its incorporation in 1890.

The company is actually more than a Dividend Aristocrat. It is a Dividend King. Dividend Kings are stocks with 50-plus consecutive years of dividend increases, the top echelon of dividend payers. You can see the full list of Dividend Kings here.

As a result, P&G is one of the safest dividend stocks in the entire stock market.

The stock may disappoint dividend growth investors. P&G’s dividend growth rate has slowed considerably over the past five years, owing to its stagnating earnings growth.

And it may be a while before investors see a return to higher dividend growth rates. Investors will need to exercise patience to allow the company’s turnaround to materialize.

That being said, P&G remains the gold standard among reliable dividend stocks.

(Published Nov. 13 by Bob Ciura)

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

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