The venerable consumer products giant Procter & Gamble (NYSE:PG) has a lot going for, and a lot going against it, right now. The owner of such well-known brands as Tide, Pampers, Crest, and Gillette seems stuck in a funk as a stronger dollar, prospect for higher interest rates, and slowing growth seems to have taken a hold over the stock, down 11% year-to-date.
Is the future any brighter or will the present trend continue. What should investors holding the stock right now, or considering a position, do?
Pros
A couple of the positives that exist right now include the company's dividend history and strong management in place (again).
For retirees seeking a steady stream of passive income that might compliment pensions, annuities, and Social Security benefits there is nothing like a company that has been growing dividends for a long time. P&G has been paying a dividend since 1891 and has increased it every year since 1956. Over the past 5 years and 10 years the quarterly payout has risen 38% and 137% respectively, easily keeping up with inflation. And today the stock yields 3.3%, exceeding that of the 10-year Treasury note by over a full point and many of its fellow Dividend Aristocrats, those large-cap companies that have increased dividends for at least 25 years in a row.
He's back. A.G. Lafley, who ruled the roost at company headquarters in Cincinnati back in its heyday of the 2000s when revenue doubled, has returned as CEO after a brief retirement. Mr. Lafley, who replaced Bob McDonald, the current Secretary of the U.S. Department of Veteran Affairs, in 2013, had a knack for doing the right thing for P&G. While he was in charge the company was hitting on all cylinders.
Potential investors should be aware of some of his current moves, which include a divesture of about a hundred of the current product lines, including Duracell, which is being scooped up by Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B), and Camay and Zest (outside the U.S.) soap, headed to Unilever Plc (UL). This could prime growth going forward.
Cons
Not everything smells like roses for P&G right now. While the company has an enviable dividend record shareholders should be keeping a wary eye on a few metrics. How long will the board of directors be able to keep boosting the dividend in the current environment that consists of a relatively elevated payout ratio of more than 80%, a strong dollar which has been suppressing growth, and amid a slowdown in earnings over the past two years?
And the stock isn't cheap by any measure. With a trailing P/E of 25, higher than the overall market and its recent history, the stock seems pricey. Throw in an elevated P/S and P/B as compared to the rest of the market and most analysts would conclude that shares are not a bargain right now.
And speaking of those rising interest rates, the yield on the 10-year note has increased somewhat over the last month. Retirees might conclude that they could be better off taking some risk off the table and invest in bonds instead.
Bottom line
So what should investors do? A prudent course of action will depend on your current situation. If you own P&G shares now by all means hold them and keep cashing those dividend checks every 3 months. Based upon the history it is probable that the board will keep bumping up the dividend in spite of the high payout ratio. The divestment binge underway might free up some funds and with some room to borrow, long term debt is low, the company could keep the streak going.
However, if you are thinking about initiating a position you might want to let Mr. Lafley's initiatives take hold first and boost growth and see what interest rates do over a longer period of time. The stock is probably too expensive right now and investors have some alternatives, like bonds, to consider.
Mark Morelli
I'm a retired electrical engineer and adjunct professor of math and engineering. I am also working on an engineering book.I have been investing for over 30 years, starting off with stock index funds, bond funds, and stable value funds and later migrating in part to dividend paying stalwarts as retirement approached. I typically use a "buy and hold" strategy with an eye on the long-term.I am a member of the "Apple cult" so until it is proven otherwise that Apple is not a great company that develops and sells great products that people love I will continue to buy their products and own their stock.
Analyst’s Disclosure: I am/we are long PG. 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.
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