One of the interesting trends that seems to inevitably come out of periods of economic uncertainty is investor rotation into “defensive” sectors, which usually includes Utilities, Consumer Staples and other pockets of the market that investors tend to think of as safe havens when market uncertainty is high. Another favorite topic analysts seem to like to start talking about under these kinds of conditions is dividend-paying stocks; it’s pretty normal to start seeing increasing commentary and reports not only about the utility of dividends, but also others that will compile lists of the “best” dividend stocks to pay attention to right now.
One of those interesting lists is what some people refer to as “dividend kings.” These are stocks that have a long history of consistent dividend payments, supported by a regular pattern of increasing their dividend payout over time. That kind of consistency is a rare thing; for example, there are 10 publicly traded U.S. companies that have managed to maintain, and increase dividend payments for more than 120 consecutive years. That is a distinction that strongly suggests not only that a company has a disciplined approach to managing their bottom line, but also a corporate culture dedicated to returning value to its shareholders that stands above the rest of the market. It’s a mindset that I believe smart management teams in younger publicly traded companies should try to adopt to follow in the footsteps of these market aristocrats.
This select list of stocks – what I’ll call the “Kings of Dividend Kings” – is made up of pretty recognizable names. Proctor & Gamble Company (PG) may stand above all of them; its history of stable dividend payments stretches back more than 130 years, with 65 years of consecutive increases in its dividend payout. That is a remarkable distinction that arguably makes PG the King of All Dividend Kings. Extended pandemic conditions haven’t deterred the company’s success, either; in fact the global consumer shift towards stocking households, with increased focus on health and cleanliness that has helped their bottom line and bolstered their balance sheet. The pandemic has also given PG an opportunity to gain market share in both of its operating categories, as well as in the geographies it competes in, as consumers have relied on familiar, established names for many of the household goods they use. All of these factors are excellent reasons to think about PG as a stock that could offer an interesting combination of growth looking ahead as well as a defensive hedge against risk; but that doesn’t necessarily mean that it also fits the classical description of a good value.
Fundamental and Value Profile
The Procter & Gamble Company is focused on providing branded consumer packaged goods to the consumers across the world. The Company operates through five segments: Beauty; Grooming; Health Care; Fabric & Home Care, and Baby, Feminine & Family Care. The Company sells its products in countries and territories primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, wholesalers, baby stores, specialty beauty stores, e-commerce, high-frequency stores, pharmacies, electronics stores and professional channels. It offers products under the brands, such as Head & Shoulders, Herbal Essences, Pantene, Rejoice, Olay, Old Spice, Safeguard, Secret, SK-II, Braun, Gillette, Venus, Crest, Oral-B, Metamucil, Neurobion, Pepto-Bismol, Vicks, Ariel, Downy, Gain, Tide, Cascade, Dawn, Fairy, Febreze, Mr. Clean, Swiffer, Luvs, Pampers, Always, Always Discreet, Tampax, Bounty, Charmin and Puffs. PG’s current market cap is $350 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -2.6%, while sales rose 7.05%. In the last quarter, earnings declined -10.3% while sales grew by 4.62%. PG is a company with a very healthy margin profile that has narrowed in the last quarter. In the last quarter, Net Income as a percentage of Revenues was 15.34% versus 18.79% in the last twelve months. The deterioration is a concern, but doesn’t change the fact PG’s operating profile remains very healthy.
Free Cash Flow: PG’s free cash flow is strong, at $15.6 billion. This is also a number that has increased steadily since the second quarter of 2017; it is also a sizable increase from two years ago, when Free Cash Flow was $12.2 billion, and a modest increase over the last year, from $15.1 billion. The current number translates to a modest dividend yield of 4.43%.
Debt to Equity: PG has a debt/equity ratio of .50. This is a conservative number that generally suggests the company follows a conservative approach to leverage and debt management. Their balance sheet shows cash and liquid assets of $10.2 billion (versus more than $16 billion a year ago) against long-term debt of $23.1 billion. PG’s strong liquidity and healthy operating profile mean that servicing debt isn’t a problem.
Dividend: PG pays an annual dividend of $3.48 per share, which translates to a yield of about 2.41% at the stock’s current price. Consider also that a year ago, their dividend was $3.16 per share; that means the company has maintained its long history of dividend increases even as other fundamentally solid companies have been forced to reduce or even eliminate their dividends to conserve cash.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $107.50 per share. That means that, despite all the strengths I just outlined, PG is significantly overvalued, with -25% downside on a strict valuation basis from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above traces the last year of price activity; the diagonal red line traces the stock’s downward trend from December 2020 to its low in March at around $121.50. It also provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. From that low point, PG had moved into an impressive upward trend that peaked in August at around $145 and has marked immediate resistance since then. The stock has begun to consolidate at the top end of that range, with current support sitting at around $141. A drop below that point should find next support at around $139, while a push above $145 should see the stock test its 52-week high at $147, or possibly push to around $149 if bullish momentum accelerates.
Near-term Keys: PG has a lot of positives going for it – stable, growing dividend, large cash position, recognizable name and massive market presence in a high-demand sector of the economy, all of which have certainly been factors in the stock’s strong upward trend to this point. Even so, I wouldn’t describe PG as a good value-based pick right now. If you want to take a short-term approach, look for a break above $145 as a signal to buy the stock or work with call options with an eye on $147 to $149 as a bullish price target. Given the strength of the upward trend and the limited downside to next support, there isn’t much going for a bearish trade, but if you are willing to work with quick exits, a drop below $141 could offer a signal to consider shorting the stock or working with put options, using $139 as a practical exit point on the bearish side.