Company Description: The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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 premium to all four valuations above. Since PG's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 16.1% premium to its calculated fair value of $67.18. PG did not earn any Stars in this section.
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 two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. PG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 55 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) or Treasury bond? 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 $994. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PG has. The stock's current yield of 2.93% exceeds the 2.71% estimated 20-year average MMA rate.
Memberships and Peers: PG is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Clorox Corporation (CLX) with a 3.0% yield, Colgate-Palmolive Co. (CL) with a 2.3% yield, and Kimberly-Clark Corporation (KMB) with a 3.3% yield.
Conclusion: PG did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks PG as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $101.03 before PG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 55 years of consecutive dividend increases. At that price the stock would yield 2.2%.
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 4.5%. This dividend growth rate is significantly lower than the 7.0% used in this analysis, thus providing a margin of safety. PG has a risk rating of 1.50 which classifies it as a Low risk stock.
Slowing growth rates in developed and emerging markets, competitive pricing, and unfavorable foreign-exchange trends have played a part in PG's recent problems. The company continues to struggle with sluggish top-line growth, due in part to its relatively lower sales into faster-growing emerging markets. To address its bloated cost structure, management announced a $10 billion cost savings plan in February 2012 that includes significant reductions in headcount. PG should benefit from innovation and growth in new markets and categories. The company's goals are to return to 8% to 10% EPS growth and free up funds for reinvestment.
PG's strengths include its broad product portfolio and vast distribution network. However, the company will continue to face margin pressure from rising commodity costs. Its free cash flow payout at 63% has crept above the 60% maximum that I prefer. This is offset with a relatively low debt to total capital of 32%. As my allocation allows, I will continue to give consideration to PG when it is trading below or near my calculated fair value of $67.18.
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 PG (4.6% of my Dividend Growth Portfolio) and long KMB. See a list of all my dividend growth holdings here.
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Tags: [PG] [CLX] [CL] [KMB]