Inflation accelerated last month to 8.6% year over year, which was the highest reading since December 1981. This has many investors concerned about the economy, and prompted the Federal Reserve to hike interest rates by 0.75 percentage points recently -- the biggest interest rate hike since November 1994.
One company whose iconic brands have allowed it to solidly navigate this high-inflation environment is the Dividend King Procter & Gamble (PG 0.19%). Let's dig into the stock's fundamentals and valuation to find out why it's a great buy for investors looking to grow their passive income.
NYSE: PG
Key Data Points
P&G's brands come with pricing power
Procter & Gamble (P&G) posted $19.4 billion in net sales in its third quarter for the period ended March 31, which equates to a 7% growth rate over the year-ago period. This easily tops analysts' $18.7 billion net sales forecast for the quarter. So, how did P&G beat analysts' net sales consensus for the eighth quarter out of the last 10?
The answer comes down to pricing power. P&G's portfolio is loaded with dozens of well-known brands, including Pampers baby diapers, Puffs tissues, Dawn dish soap, and Vicks' over-the-counter medicines.
These trusted brands are viewed as essential by millions of consumers around the world. Because of the products' perceived necessity, P&G was able to raise average prices by 5% companywide in the third quarter. Consumers appeared to tolerate these price hikes: The company's volumes increased 3% year over year during that same period. Increased demand within the healthcare segment, which boasts higher average selling prices, drove a 10% companywide increase in organic sales since the year-ago period. Factoring in a 3% loss due to unfavorable foreign currency exchange, net sales for the quarter came out to a 7% year-over-year increase.
The company recorded $1.33 in non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter, which is a 5.6% growth rate over the year-ago period. This surpassed the average analyst earnings estimate of $1.28 for the quarter, marking the 10th consecutive quarter in which P&G beat analysts' earnings forecasts.
What's P&G's secret to beating these estimates? The company's cost of products sold surged 16% higher year over year to $10.3 billion in the third quarter. This is why P&G's non-GAAP net margin declined 70 basis points over the year-ago period to 17.3% during the quarter. Share repurchases led to a 2.3% drop in the company's weighted-average diluted share count to 2.6 billion, which somewhat made up for its lower margins.
Image source: Getty Images.
The longest dividend growth streak of its peers
P&G's 5% raise in its quarterly dividend per share to $0.9133 in April was the 66th consecutive year of boosting its payout. For context, this is the longest dividend growth streak among Dividend Kings in the consumer staples sector. And this feat doesn't look like it will be ending anytime soon for a couple of reasons.
First, analysts believe P&G will generate 5.3% annual earnings growth through the next five years. Second, the stock's dividend payout ratio is expected to be 60.3% in its current fiscal year that will be ending later this month. This should allow for mid- to upper single-digit dividend increases in the year ahead. Given the stock's 2.7% dividend yield, this is a decent amount of dividend growth potential.
A world-class business at a fair valuation
P&G is an arguably healthy business from a fundamentals standpoint. And the current $134 share price offers investors an attractive entry point for the long run. This is because the stock's price-to-earnings (P/E) ratio of 22.9 is deservedly a bit higher than the consumer staples sector average of 20.2. That makes P&G an interesting buy for investors.
