The big money loves household products conglomerate Procter & Gamble (PG -0.46%). How can you tell? Consider that individual investors hold just a tiny sliver, only 3.5% of outstanding shares. A combination of financial institutions, insiders, investment banks, mutual funds, and other professional entities hold the rest.
Big money is crazy about Procter & Gamble. Does that mean you should feel the same way? Here is what you need to know.
Big money loves stability
Institutions typically play by different rules than retail investors; the number one rule for the pros is don't lose money. Whether it's a fund that carries the retirement nest eggs of millions of retirees or a hedge fund manager who gets quarterly bonuses, most professionals can't afford a big whiff; there's too much at stake.
Procter & Gamble is arguably one of the most stable companies in the world; it owns 65 brands that sell household products for personal hygiene, laundry, hair and skin care, oral care, and over-the-counter medicines.
Consumers tend to have buying habits, and while some may trim their budgets when times are tough, most will still buy the necessities, such as laundry detergent, toothpaste, and shampoo.
Procter & Gamble's business has grown into a behemoth that does more than $80 billion in annual revenue. It's not the fastest growing; earnings-per-share (EPS) have grown just 5% annually over the past decade, but its decades-long track record of slow and steady growth has outperformed the market by a solid margin:
The passive income is reliable
Procter & Gamble is also a Dividend King; the company has raised its payout for 66 consecutive years, one of the longest streaks of any publicly traded company.
Dividends are a way that a company's management shares profits directly with shareholders. Dividends have many benefits: First, dividends are cold, hard cash and can't be lost once a company pays them out.
Additionally, you can reinvest dividends to help boost your investment returns. Your dividends can buy you more shares, which in turn pay you more dividends. Don't underestimate this; Procter & Gamble has underperformed the S&P 500 without its dividend:
Getting to specifics, investors who buy shares today will receive a dividend yield of almost 2.5%. A rising dividend is a cash expense that grows larger each year, but Procter & Gamble still has plenty of room to raise it moving forward. The dividend payout ratio is affordable at 65% of cash flow.
Is P&G suitable for your portfolio?
Procter & Gamble can be a great building block for any long-term portfolio, but investors should know what to expect. The stock is unlikely to make you rich overnight; the company has a massive $346 billion market cap, and growth can become harder as you reach such a large size.
Analysts believe Procter & Gamble will average 6% annual EPS growth over the next three to five years. The stock's valuation at a price-to-earnings (P/E) ratio of 25 is certainly not cheap; investors are paying a premium for the company's reliability.
So if your investment goal is to build wealth as quickly as possible, Procter & Gamble might not be your ideal stock. But if your goal is to preserve wealth, or you're content with stable, high-single-digit annual investment returns over the long term, Procter & Gamble is an excellent stock worth considering.