Procter & Gamble (NYSE: PG) is a major multinational consumer goods corporation that provides a wide range of personal health, personal care and hygiene products to households across the world. Over the last few years, Procter & Gamble has done significant restructuring to focus on their critical products, reduce operational costs and improve shipping efficiency which has resulted in higher margins and recent organic growth for the company. Furthermore, Procter & Gamble has maintained a strong market presence for their key products, and the global demand for these types of goods are expected to grow over the next few years. Although the fundamentals for Procter & Gamble are impressive, they come at a rich valuation, with both the PE Ratio and starting dividend yield being significantly overvalued compared to the historical and current industry median. While Procter & Gamble offers a strong dividend generating business, I believe that the current valuation makes Procter & Gamble more appropriate for the wish list than the buy list.
The Core Business
Procter & Gamble sells consumer goods in over 180 territories in 70 countries and sells 65 key products. Over the last decade, Procter & Gamble has seen mixed results in key financial metrics, with revenue and gross profit decreasing annually on average by about 1.3% on a compounded basis and net income increasing by 1% on a compounded basis. A significant factor in this top line decline over the last few years is Procter & Gamble’s restructuring activities, which allowed the company to focus on selling their key products that make up nearly 95% of their sales. This restructuring resulted in increased productivity for Procter & Gamble and led to recent organic growth for the company. Additionally, Procter & Gamble has done an impressive job managing their long term debt, with debt barely increasing over the last decade for the company and is very well covered by the net income. Furthermore, analysts expect Procter & Gamble to grow revenue by about 4% and EPS by nearly 7.5% on average over the next few years. On first glance, Procter & Gamble has increased their operational efficiency, has very well managed long term debt and is expected to have steady top and bottom line growth over the next few years.
In order to understand if Procter & Gamble’s dividend is sustainable and the ability for the company to continue to grow going forward, let’s take a look at their key business segments. As of the end of 2020, their main business areas included:
- Beauty: The company sells skin, personal care and hair care products including deodorants, Olay, Pantene and Head & Shoulders brands.
- Grooming: Procter & Gamble provides products in the blades and razor markets including electric shavers, epilators and Braun brand.
- Health Care: Procter & Gamble competes in the oral care and personal health care product space. Some of these products include Crest, Oral-B, Vicks, Metamucil, Align and Pepto Bismol brands.
- Fabric & Home Care: The company provides a variety of fabric care products which include home care products, laundry detergents, additives and fabric enhancers. Key products include Cascade, Dawn, Swiffer and Febreze brands.
- Baby, Feminine & Family Care: Procter & Gamble is the global market leader in baby care and provide a variety of personal health and toilet paper brands.
Some of the growth predicted by analysts will likely be dependent on the global market dominance that Procter & Gamble has established. Procter & Gamble has strong market shares for their key business segments, with earnings for most business segments remaining stable and the baby, feminine & family care segment having strong growth over the last decade. Furthermore, the restructuring mentioned above has helped Procter & Gamble reduce about $3.7 billion in costs annually and the company currently boasts one of the highest after tax profit margins in their industry.
Source: Created by author from PG 10-K reports.
Many of the product markets that Procter & Gamble operate in are also expected to have steady growth over the next few years. Below, we can see the expected global demand growth for a variety of consumer goods. With the exception of Beauty & Personal Care, many of the markets that Procter & Gamble operate in are expected to have mid to high single digit growth on a compounding basis over the next few years.
Another critical advantage for Procter & Gamble is their geographical diversification and resilience during economic downturns. As Procter & Gamble provides many products which are in demand regardless of overall economic conditions, the company tends to perform well even during recessions. Below, we can see that Procter & Gamble had stable operating cash flows both during the 2008 recession and the current downturn. Furthermore, Procter & Gamble also has a strong international presence, with the company having the majority of their sales outside the United States. Taken together, Procter & Gamble is a diversified leader in consumer goods, provides products to markets that are predicted to grow over the next few years and is a very resilient company that is well positioned to have steady growth going forward.
Despite the economic resiliency of Procter & Gamble, the company can face challenges from decreases in customer discretionary spending. As mentioned above. Procter & Gamble has undergone restructuring to minimize costs and improve company efficiency. Part of their strategy involved expanding the marketing of their premium brands, with Procter & Gamble being the largest advertiser in the world as of the end of 2019. These premium brands support higher gross margins compared to lower cost alternatives. However, in economic downturns, consumer preference may shift away from premium brands to lower cost alternatives. Interestingly, Procter & Gamble has expanded their E-commerce online sales, which has experienced phenomenal growth during the global health care crisis.
Another challenge that Procter & Gamble faces is the competition in the consumer packaged goods industry and the ability for the company to sustain organic growth. Procter & Gamble has many competitors including Unilever, Kimberly Clark, Colgate-Palmolive, Clorox, Church & Dwight and new low cost entrants like dollar shave club which can steal market shares of products away from Procter & Gamble depending on changes in consumer preference. Furthermore, Procter & Gamble has had challenges in previous years providing organic growth, though this last year the company reported a 9% growth in sales and increased their guidance for 2021. The ability for Procter & Gamble to maintain a competitive advantage and provide innovations to meet consumer preferences will be critical for the company.
Valuation & Dividend Analysis
The table below shows some of the key valuation metrics for Procter & Gamble as of Friday November 20th. Below, we can see that Procter & Gamble is overvalued, with the forward PE ratio being much higher than the historical median for the last decade and for the industry. Furthermore, the current dividend yield is much lower than the historical median for the company. However, where Procter & Gamble really stands out is with their impressive ROC (Joel Greenblatt) and the healthy free cash flow payout ratio. Furthermore, Procter & Gamble is a dividend king with over 64 years of dividend increases, over 120 years of paying dividends and has a great long term credit rating.
|Forward PE Ratio||25.05|
|10 Year Median PE Ratio||21.03|
|Sector Median PE Ratio||19.11|
|10 Year Median Dividend Yield||3.02%|
|2020 FCF Payout Ratio||54.35%|
|Forward PEG Ratio||3.11|
|ROC (Joel Greenblatt)||82.94%|
|Industry Median ROC (Joel Greenblatt)||10.09%|
|Long-Term Standard & Poor Credit Rating||AA-|
Source: Created by author using data from Seeking Alpha and Gurufocus.
Procter & Gamble is an impressive company with many appealing qualities. Procter & Gamble is a heavily diversified company both in terms of products and geographical sales, is a leader or holds major market shares for many of their business segments and has significantly increased the efficiency of their business through restructuring. Furthermore, the global demand for products that Procter & Gamble provides including Men’s grooming, fabric care, feminine care and baby care is expected to have mid to high single digit growth on a compounding basis over the next few years. Additionally, Procter & Gamble has a history of providing strong financial performance during downturns and is a dividend king. Finally, Procter & Gamble is a very efficient company reflected by their impressive ROC (Joel Greenblatt) and has a very well managed long term debt.
However, this premium company comes at a rich valuation. Procter & Gamble is currently at a very high forward PE Ratio compared to both their historical and industry medians. Furthermore, the current dividend yield is also underwhelming for Procter & Gamble, with the current 2.27% yield being much less than the historical 3% yield.
Below I summarize what aspects of the company I’m personally optimistic and pessimistic about. I believe that Procter & Gamble is a premium company that could make a very compelling dividend investment. However, the current price is a bit too overvalued for my preference, with a dividend yield closer to 3% being more of a fair value in my opinion. Taken together, I believe that Procter & Gamble could provide an appealing dividend company, though the company’s current valuation makes me add Procter & Gamble to the wish list instead of the buy list.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a financial advisor and this is not financial advice. Not all relevant risks are covered in this article. Investors should contact a licensed financial advisor and do their own research before investing.