Summary
-Procter and Gamble (PG) is a very large company with a diverse range of products across the planet.
-Five year average annual revenue growth is about 9%.
-Five year average annual earnings growth is about 13%.
-The dividend yield is currently over 3% and has a five year average annual growth rate of about 12%.
-The company has an impressive balance sheet with a fairly low level of debt.
-PG stock looks attractive to me for the long term at current prices in the low $60s.
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Overview
Founded in 1837, Procter and Gamble (symbol: PG) is now one of the largest companies in the world. They sell their products in over 180 countries and currently have a market capitalization of $180 billion.
Business Segments
PG is divided into three business units:
Beauty and Grooming
In this unit, PG holds brands such as Gillette, Olay, Pantene, Old Spice, Venus, Hugo Boss, Cover Girl, Dolce and Gabbana, and more. Beauty and Grooming accounts for 32% of total 2009 company revenue.
Health and Well-being
In this unit, PG holds brands such as Always, Crest, Oral B, Scope, Tampax, Pepto Bismol, Iams, and more. Health and Well-being accounts for 21% of total 2009 company revenue.
Household Care
In this unit, PG holds brands such as Tide, Swiffer, Puffs, Pampers, Mr. Clean, Downy, Febreeze, Gain, Duracell, Dawn, Downy, Cheer, Bounty, Bounce, Cascade, and more. Household Care accounts for 47% of total 2009 company revenue.
Revenue, Earnings, Cash Flow, and Margins
Procter and Gamble has been adept at growing despite its massive size.
Revenue Growth
| Year | Revenue |
|---|---|
| 2009 | $79.029 billion |
| 2008 | $81.748 billion |
| 2007 | $74.823 billion |
| 2006 | $66.724 billion |
| 2005 | $55.292 billion |
| 2004 | $51.407 billion |
This represents an average annual revenue growth rate of about 9% over the last five years. This is quite amazing for such a large company.
EarningsGrowth
| Year | Earnings |
|---|---|
| 2009 | $13.436 billion |
| 2008 | $12.075 billion |
| 2007 | $10.340 billion |
| 2006 | $8.684 billion |
| 2005 | $6.923 billion |
| 2004 | $7.257 billion |
This represents an average annual income growth rate of about 13% over the past five years, which again is quite amazing. It should be noted, however, that during 2009, Proctor and Gamble discontinued operations of some of its businesses, so its income from continuing operations is down to $11.3 billion. An example of this is their large sale of Folgers coffee to Smuckers company.
Operating Cash Flow Growth
| Year | Cash Flow |
|---|---|
| 2009 | $14.9 billion |
| 2008 | $15.0 billion |
| 2007 | $13.9 billion |
| 2006 | $11.4 billion |
| 2005 | $8.6 billion |
During these four years, PG has grown operating cash flow by nearly 15% annually on average.
Profit Margin
In 2009, Procter and Gamble had a net profit margin from continuing operations of 14.3%. This number in 2005 was 12.0%.
Dividends
Procter and Gamble stock currently has a dividend yield of about 3.10%. This is fairly high compared to its average dividend yield over the past five years. The company has been paying a dividend for 120 consecutive years and has increased its annual dividend for the past 54 consecutive years. Numbers like this are worthwhile to take a minute to dwell on.
Dividend Growth
| Year | Dividend | Yield |
|---|---|---|
| 2009 | $1.72 | 3.30% |
| 2008 | $1.55 | 2.30% |
| 2007 | $1.36 | 2.10% |
| 2006 | $1.21 | 2.00% |
| 2005 | $1.09 | 2.00% |
| 2004 | $0.98 | 1.90% |
During these past five years, PG has grown its dividend by about 12% annually on average.
The dividend payout ratio is currently less than 50%, meaning that Procter and Gamble is sending a lot of their money to the shareholders but also has plenty of room for safeguarding and growing that dividend.
Balance Sheet
The company has a LT Debt/Equity ratio of 0.35 and a Total Debt/Equity ratio of 0.46. These low numbers represent a fairly low level of debt, which is a great thing.
Investment Thesis
As can be seen by the above numbers, this massive worldwide financial crisis, which included the biggest recession in United States history since the Great Depression, was a mere hiccup for Procter and Gamble. If one were to look at these numbers without knowledge of the crisis, one would likely acknowledge the existence of only a small recession. This is the strength of Procter and Gamble.
So what does PG offer investors? Consistency, Robustness, Diversity, Safety, Growth, and more. PG is known for its strong dedication to developing leaders within its organization and thinking years ahead when it comes to planning. They don’t just figure things out as they go, but instead think well into the future, much like a good investor should do.
The company’s products are diverse, useful, and rather easy to understand. This isn’t a company that can go out of business due to a technological shift, as their products are widespread and fairly simple. The size of the company gives it safety and strength, and so far does not seem to be hampering growth that much.
At it’s core, Procter and Gamble is a brand management company. Their products are often the best around, but their brands just as important. The company owns 22 billion-dollar brands and 20 half-billion-dollar brands.
The company’s long-term goal is to have a organic sales growth of 4-6%, with 10% diluted EPS growth per year. Developing markets are playing a larger and larger role in the growth of the company, accounting for 29% of sales in 2007 and 32% of sales in 2009.
PG identifies their five major strengths as follows:
Consumer and Market Research
PG does more market research than any other company in the world. According to the 2009 annual report, the company conducts over 15,000 research studies per year.
Innovation
PG continually develops new brands and new products within existing brands.
Brand-Building
The majority of PG brands hold #1 or #2 spots in their categories.
Go-To-Market Capabilities
PG is a logistics powerhouse, using its large size to be an efficient and fast supplier of its products.
Scale
PG is among the largest of companies in the world, and leverages its size to gain efficiency in most of what it does.
Risks
Like any company, PG does have some risk. They are resilient, but not immune, to recessions. Tough times lead people to buy cheaper products. They face currency risk due to their global operations, and are vulnerable to changes in commodity costs.
Conclusion and Valuation
I think PG stock is at a pretty good value right now in the low $60s. The P/E is at around 15, long-term growth prospects appear to be solid, the dividend is moderately sized, growing, and safe, debt levels are low, the company always has a long-term outlook, the products are fairly easy to understand and most investors probably use some of them quite often, and the company has a worldwide reach.
Full Disclosure: I do not have any position in PG at the time of this writing.
You can see my full list of individual holdings here.
Edit: My portfolio now includes PG.
Further reading:
3M Company (MMM) Dividend Stock Analysis
Wal-Mart Stores (WMT) Dividend Stock Analysis
Automatic Data Processing (ADP) Dividend Stock Analysis
Waste Management (WM) Dividend Stock Analysis
8 Reasons to go with Dividends
anon, I don’t follow Citi that colesly. They are obviously not my first choice in U.S. financials as i would look to BAC, WFC, or USB first. Citi will likely be fine long term, however i will not be surprised to see them cut the dividend which will probably help the stock.