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Mon. Jul. 27, 2009

Procter & Gamble Co. (PG) Dividend Stock Analysis *

This article originally appeared on The DIV-Net July 20, 2009.

Linked here is a detailed quantitative analysis of Procter & Gamble Co. (PG). Below are some highlights from the above linked analysis:

Company Description: The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number

PG is trading at a discount to 1.), 2.) and 3.) above. Since PG’s tangible book value is not meaningful, a Graham number can not be calculated. PG is trading at a 15.2% discount to its calculated fair value of $65.98. PG earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%

PG earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company earned a Star as a result of its most recent Debt to Total Capital being less than 45%. It also earned a Star for having an acceptable score in at least two of the four Key Metrics measured. PG has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 53 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

  1. NPV MMA Diff.
  2. Years to > MMA

PG earned a Star in this section for its NPV MMA Diff. of the $1,964. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PG has. If the company grows its dividend at 10.9% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.82%. PG earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Other: PG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. Product demand for household and personal care products is generally stable and not affected by changes in the economy or geopolitical factors. PG has historically delivered consistent sales and earnings growth near the high end of its peer group, and I see no reason for this to change over the next several years. The company continues to benefit from the Gillette acquisition and from growth prospects in new markets and categories. It is well positioned to benefit from growth of household and personal care products in developing countries. Risks include heightened competition, unfavorable currency translation, higher commodity costs, higher promotional spending and low consumer acceptance of new products.

Conclusion: PG earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks PG as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $87.72 before PG’s NPV MMA Differential fell to the $500 that I like to see for a stock with 53 consecutive years of dividend increases. At that price the stock would yield 1.87%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.6%. This dividend growth rate is well below the 10.9% used in this analysis, thus providing a margin of safety. PG has a risk rating of 1.25 which classifies it as a low risk stock.

When it comes to dividend stocks, PG is one of the very few elite companies. It is a well-managed company with a very strong balance sheet. PG has weathered the economic downturn quite well and continues to raise its dividend at a rate close to its 10-year average. I will continue to add to my position when PG is trading below its buy price of $65.98 and as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in PG (3.6% of my Income Portfolio).

What are your thoughts on PG?


2 Responses to “Procter & Gamble Co. (PG) Dividend Stock Analysis *”

  1. RHW says:

    Excellent analysis.

    I have to add that you may want to consider a ‘negative stars’ aspect to your analysis. I have yet to invest in PG due to its tangible book value, and would award it at least one negative star for this departure from reality.

  2. RHW: At one time I did use negative stars, but it complicated the system. As for PG’s intangibles, I believe there is value in their intangibles (trade names, etc.) However, I am skeptical when all the intangible value is in goodwill.

    Best Wishes,
    D4L