Whether it's sports or stocks, coming through when it matters most is a highly sought-after quality. In sports, clutch performers have good or even better stats when the chips are down, and they're known to come up big during crunch time. In the stock market, this performance under pressure is a little more complicated.
With a growth stock, it can mean the ability to expand a business at an impressive clip even when the company balloons to mammoth proportions (think Apple or Amazon).
For dividend stocks, however, clutch performers have the ability to gradually grow the business while earning boatloads of free cash flow (FCF) that can support share repurchases and dividend raises. The very best dividend stocks have fairly predictable cash flows so their performances don't vary too much based on the economic cycle.
Procter & Gamble (PG 0.68%) continues to be arguably the single-most reliable dividend stock in the entire market. Here are three reasons it deserves this recognition.
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1. Inflation resistance
One of my favorite things about Procter & Gamble is its no-nonsense approach to industry headwinds. P&G may have sophisticated supply chains, established partnerships, and a great reputation, but it's not immune from rising costs due to inflation.
Last week, P&G reported its third-quarter fiscal 2022 results. In the report, the company said it expects to incur a staggering $3.2 billion in after-tax headwinds in the 12-month period ending June 30. Those headwinds are mostly due to higher commodity costs, but higher shipping expenses and foreign exchange impacts contributed as well.
Instead of citing challenges as a reason for missing guidance, P&G hit its guidance and raised its full-year revenue outlook. It grew organic sales in all 10 of its product categories and maintained its full-year earnings guidance despite the $1.26 per share hit from after-tax headwinds.
Critics may argue P&G knew all along that inflation was not transitory and that it would continue to be a major issue for the whole fiscal year, so management purposely guided for numbers it could hit. But even if that is true, investors always prefer a company to under promise and over deliver so they can trust the guidance -- not be caught off guard with shocking news (just look at the reaction to Netflix's latest earnings).
What's more, P&G's results were still at near-record levels and higher than numbers from the prior-year quarter with net sales coming in 7% higher and core and diluted earnings per share each up 6%.
2. Commitment to dividends and buybacks
Whether we are in a bull or bear market, there's never a bad time to be collecting passive income. Companies that pay growing dividends provide income without the need to sell shares when the market is down, which alleviates pressure on investors or retirees who depend on their investments for the majority of their income.
P&G is a Dividend King, a company that has paid and raised its dividend for at least 50 straight years (P&G currently boasts a 66-year streak). The company is buying back more stock than ever before -- $11.8 billion on a trailing-12-month (TTM) basis -- and it paid $3.48 in TTM dividends, up over 60% in the past 10 years.
Data by YCharts.
3. Plenty of free cash flow
P&G's FCF came in lower than in prior quarters due to the headwinds mentioned above. But even then, the company's free cash flow yield remains considerably above its dividend yield.
Similar to dividends, the free cash flow yield represents FCF per share, divided by the share price. It basically shows the dividend yield the company could theoretically have if it were distributing 100% of its FCF to shareholders through the dividend. P&G, of course, does not do that.
In fact, it plans to spend a total of $10 billion on buybacks, compared to $8 billion on dividends, when fiscal 2022 is all said and done. However, P&G deserves credit for consistently generating substantially more FCF than is needed to pay and raise its dividend.
Data by YCharts.
Looking back over the last 10 years, we can see that P&G's FCF yield is usually well above 4%, while its dividend yield is between 2% and 3%. However, P&G's FCF yield is on the low end of that 10-year range right now, while its dividend yield is also a lot lower than normal, because the stock price has climbed faster than P&G has raised the dividend.
Put another way, P&G stock is on the expensive side right now with shares trading within a few percentage points of their all-time high.
A stock you can count on when times are tough
P&G deserves its premium valuation, though, because of its consistent growth, commitment to shareholder value through stock buybacks and dividends, strong FCF generation, and the fact its business is resistant to recessions and inflation.
Consumer staples, utilities, and healthcare stocks are seen as safe investments during a recession, because demand doesn't change as much based on the economy relative to sectors such as consumer discretionary or industrials. P&G has also proved it can manage rising costs from inflation without jeopardizing its top or bottom-line growth. Add it all up, and P&G is a stock you'll want in your corner if the market crashes.
