It's often been said that a rising tide lifts all boats. This was the case for many (but not all) stocks on the S&P 500, which surged 27% in 2021.
One stock that was lifted as a result of the financial market boom in 2021 was the Dividend King Procter & Gamble (PG -0.03%), which has raised its payout annually for 65 straight years. Even though the stock was up 18% in 2021, I believe it is still a buy. Here are three reasons why.
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1. P&G's business is chugging along
After generating 7% year-over-year revenue growth to $76.1 billion in its last fiscal year ending June 30 and 11% non-GAAP (adjusted) diluted earnings per share (EPS) growth to $5.66, Procter & Gamble (P&G) got off to a solid start in its new fiscal year.
P&G reported $20.34 billion in net sales during its first quarter, which represents a 5.3% growth rate against the year-ago period. This topped the analyst consensus of $19.87 billion for the quarter. But how did P&G do it?
P&G was able to record 4% organic net revenue growth during the quarter, which was driven by a 2% increase in volume, 1% increase in pricing, and a favorable sales mix of 1%. P&G's 2% increase in volume despite a slight increase in its pricing demonstrates its pricing power, which means the company can probably make further price hikes to consumers to offset rising costs. P&G's pricing power comes from having leading brands that consumers prefer, such as its Tide laundry detergent, Crest toothpaste, and Bounty paper towels. The 1% favorable sales mix refers to the growth in P&G's healthcare segment, whose products have higher-than-average selling prices. The remaining 1% of revenue growth was the result of favorable currency translation.
Despite Procter & Gamble passing little of the increased commodity and freight costs on to consumers in the quarter, the company remained quite profitable. As a result, P&G's non-GAAP diluted EPS declined only 1.2% year over year to $1.61 for the quarter. This was just ahead of the analyst forecast of $1.59 in non-GAAP diluted EPS during the quarter.
Given the decent start to its fiscal year, P&G management is forecasting 3% full-year sales growth at the midpoint and 4.5% non-GAAP diluted EPS growth for the year at the midpoint. Given the challenging inflationary environment, I would argue that this is satisfactory growth for the company. And P&G's resilience in difficult operating environments due to its brand power is precisely why analysts are projecting 7% annual earnings growth over the next five years.
2. Procter & Gamble's payout that is very safe
P&G appears to be steadily growing. But is the dividend payout ratio low enough to withstand a temporary downturn in its earnings power?
Assuming a 6.9% raise in P&G's quarterly dividend, raising it to $0.93 per share, the company will pay $3.54 in dividends per share this fiscal year. Against the $5.92 in non-GAAP diluted EPS that analysts are expecting this fiscal year, this would equate to a 59.8% payout ratio. P&G's payout ratio near 60% strikes an appropriate balance between rewarding shareholders in the present with a market-beating 2.1% dividend yield while also investing to generate future earnings growth.
Thus, P&G seems to be well-positioned to build on its reputation as a Dividend King going forward.
3. P&G is a reasonably valued blue-chip stock
P&G is a fundamentally strong stock. But is the stock trading at a valuation that justifies buying it at the current $165 share price?
P&G is priced at a forward P/E ratio of 25.7, which is moderately lower than the household and personal products industry average of 32. At a glance, this suggests that the stock is attractively valued compared to its peers. However, I believe it's important to also look at a company's growth prospects versus its industry to gauge whether it is undervalued. P&G's 7% annual earnings growth is in line with the industry average.
If investors are looking for a high-quality dividend stock trading at a sensible valuation, I believe they would do well to consider buying P&G at its current price.
