Procter & Gamble (PG 0.60%) is feeling flush with cash. Fresh off a record fiscal year for growth thanks to spiking demand for home essentials, the consumer staples giant just raised its dividend to $0.87 per share, or 10% above its prior rate.
The move telegraphs possible good news for investors in P&G's upcoming earnings report, set for Tuesday, April 20. Let's look at a few of the reasons the dividend hike is worth investors' attention.
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1. One more way to stand out
P&G has been beating industry peers throughout the pandemic, with sales growth and profit margins consistently outpacing companies like Kimberly-Clark (KMB 5.51%), which most directly competes with P&G in the diapers niche. The higher dividend confirms that the company is more aggressively returning cash to shareholders, too.
Kimberly-Clark is targeting the same roughly $2 billion annual cash return in 2021 after raising its dividend by 6.5%. P&G, in contrast, recently raised its annual cash return commitment by $2 billion and now expects to deliver $18 billion to shareholders this year. Tack on the 10% annual dividend hike, and it's easy to see why income investors would love this stock.
2. Follow the cash
There were some hints in P&G's last earnings report that suggested a major dividend hike was on the way. In January management had just raised its growth outlook for a second consecutive quarter, for one. CEO David Taylor and his team also highlighted their industry-leading profit margins that are supported by rising prices and by a shift in demand toward premium products across categories such as skin care, fabric care, and home cleaning.
P&G cash from operations (TTM) data by YCharts. TTM = trailing 12 months.
But the bigger factor is cash flow, which crossed $10 billion over the prior six months compared to $8.5 billion a year earlier. P&G is hitting all of its reinvestment priorities but still generates far more cash than the business needs.
3. There's better news to come
The pessimistic way to read this dividend increase is that P&G is making up for the fact that growth will slow over the next year as the pandemic improves and as consumers work through all the excess products from the pantry-loading phase of the crisis. Kimberly-Clark is projecting just a 1% to 2% uptick in 2021, after all, compared to last year's 6% spike. P&G executives might be looking to reward shareholders in other ways as the company endures a similarly sluggish period.
The more bullish reading is that P&G is about to outperform its short-term targets for a third straight quarter -- it targets 6% organic growth in fiscal 2021. The fiscal Q3 earnings report might also show evidence for management's theory that much of the COVID-19 demand lift will remain even as consumers resume their normal mobility patterns.
In any case, P&G's dividend yield is rising, while the stock has been left out of this past year's market rally even though the business is firing on all cylinders. So if the Dividend King has been on your watch list, you might want to consider putting it into your portfolio, either before or after its earnings report on April 20.
