Thanks to its streak of over 60 consecutive years of annual dividend increases, there's never any real suspense over whether Procter & Gamble (PG -6.23%) will hike its payout each year. The question is more about the size of P&G's yearly increase. There has been a wide range in that metric over the past two decades, with the consumer giant's biggest hike, 14%, occurring just before the market downturn started in 2008. Its slowest increase happened in 2016, when income investors saw just a 1% boost to their annual income.
P&G normally announces its new dividend in early April, and this year shareholders have some good reasons to expect an unusually big raise. Let's look at a few.
Shareholders went a few years without seeing a single upgrade to P&G's annual growth outlook. But they've now seen three such boosts from the management team, including back-to-back increases over the last two quarters. CEO David Taylor now projects organic growth landing at 4.5% in fiscal 2020.
We're talking about robust, volume-driven sales growth that also translates into market share gains against peers like Kimberly-Clark, which is expanding at a 2% clip right now. That means management this year will be deciding on its 2020 dividend after a period of some of its fastest sales gains in over a decade.
Plenty of cash
P&G's finances are looking especially strong, too, with core adjusted earnings leaping higher by 18% over the last six months. Gross profit margin is up and selling expenses are down, which has led to an improvement in its already market-thumping profitability. Operating margin so far in 2020 is up to 24.3% of sales compared with 21.8% a year ago.
Its dividend is well covered by cash flow, too, with the $3.9 billion P&G paid out in dividends over the past two quarters translating into less than half of its operating cash flow. Notably, Taylor and his team boosted their targets for cash flow and earnings when they reported fiscal second-quarter earnings in late January.
The actual upgrade
There are two other factors that aren't as supportive of a significant dividend hike in April. First, P&G is predicting a slower expansion rate for the second half of its fiscal year as it goes up against a tough comparison with the prior-year period and as competition targets more of its recent market share gains. Second, management has shown a clear preference for stock repurchase spending since that cash return channel is more flexible. Executives could decide again this year to tilt much more of their excess cash toward reducing the share count.
Still, I'd be surprised if we didn't see a dividend increase that reflects the faster sales and profit growth that P&G is registering across its portfolio of consumer goods right now. That hike isn't likely to hit the high single digits that shareholders saw in 2013, but it could easily surpass the 4% increase the company has announced in each of the last two fiscal years.