In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:
- Over time, has this company steadily increased its payouts?
- How sustainable is the dividend?
- Does the company have room to further increase the dividend?
The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.
Today's pupil is Procter & Gamble
Dividend history
|
Metric |
5-Year Annualized Growth Rate |
|---|---|
| Dividend per share |
11.5% |
Source: Procter & Gamble investor relations.
Procter & Gamble has one of the most enviable dividend track records around, having paid dividends for 120 consecutive years with 54 consecutive years of dividend increases.
Dividend growth has been pretty strong over the past five years, but past returns don't guarantee future results, so dividend history is only 10% of the final grade. Procter & Gamble does, however, score a 5 of 5 in this category.
Sustainability
|
Metric |
Trailing 12 Months |
Final Grade |
Report Card Score |
|---|---|---|---|
| Interest coverage |
18.4 times |
10% |
5 |
| EPS payout ratio |
50.3% |
10% |
4 |
| FCFE payout ratio |
54.8% |
30% |
4 |
Source: Capital IQ, a division of Standard & Poor's, as of Feb. 23.
These are all signs that the current dividend payout is sustainable. The balance sheet is strong (Morningstar gives P&G a credit rating of "AA") and the payout is well-covered by both profits and free cash flow. Additionally, in its latest annual report, P&G stated that the "first discretionary use of cash is dividend payments."
Growth
|
Metric |
Trailing 12 Months |
Final Grade |
Report Card Score |
|---|---|---|---|
| EPS payout ratio |
50.3% |
10% |
3 |
| FCFE payout ratio |
54.8% |
20% |
3 |
| Sustainable growth rate |
8.3% |
10% |
4 |
It doesn't look like Procter & Gamble's consecutive dividend increase streak is in any trouble, though I would expect the growth rate over the next five years to be in the 7-9% range rather than the 11.5% growth of the past five years.
Why? First, the median analyst estimate for long-term earnings growth is 9.5% and P&G has tended to grow the dividend at roughly the same rate as earnings per share. Also, analysts tend to be an optimistic bunch and I'd rather err on the conservative side.
Next, P&G's earnings payout ratio has been climbing, from 39.8% at year-end 2007 to 50.3% today, and it's unclear how much P&G can further increase that ratio without adversely affecting growth.
Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.
|
Company |
Dividend Yield |
Median Analyst Est. Long-Term |
|---|---|---|
|
Colgate-Palmolive |
2.7% |
9% |
|
Kimberly Clark |
4.3% |
8% |
|
Unilever |
3.8% |
10% |
With its current yield at 3%, Procter & Gamble's dividend yield is in-line with this peer group, so I don't think it's likely that the board will slow growth due to peer pressure.
Pencils down!
With all the numbers in, here's how P&G's dividend scored:
|
Weighting |
Category |
Final Grade |
|---|---|---|
|
10% |
History |
5 |
| Sustainability | ||
|
10% |
Interest Coverage |
5 |
|
10% |
EPS Payout Ratio |
4 |
|
30% |
FCFE Payout Ratio |
4 |
| Growth | ||
|
10% |
EPS Payout Ratio |
3 |
|
20% |
FCFE Payout Ratio |
3 |
|
10% |
Sustainable growth |
4 |
|
100% |
Total Score (out of 5) |
3.9 |
| Final Grade |
B |
Procter & Gamble's score has fallen a bit since we last looked at it in July, due primarily to slightly higher payout ratios. It's something to keep an eye on in future reviews of the dividend, but it's certainly no reason to panic.
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