Procter & Gamble (PG -0.32%) is an iconic company with an incredible history behind it. That alone, however, isn't enough reason to buy the stock. Here's a closer look at this consumer staples giant, and why value investors might want to hold off on adding this name to their portfolios (even though more conservative investors might still find it appealing).
A great business
Procter & Gamble owns a collection of sector-leading brands that generally sit at the high end of their specific categories. The list includes names you probably know, like Bounty, Tide, and Oral-B, among many others. Generally speaking, management works hard on the innovation front to ensure that the premium prices it charges are justified by the benefits its products offer to consumers.
Image source: Getty Images.
The company's vast scale -- it has a huge $300 billion market cap -- affords it important benefits as well. For example, it has the financial wherewithal to invest in the innovations that help differentiate its brands. It also has the heft to aggressively market and distribute its products. That includes the ability to create entirely new product categories, like the company's Swiffer business. All in, retailers like to partner with strong competitors like Procter & Gamble. The importance of this can't be underestimated, especially during difficult economic times.
Recently, Procter & Gamble's business has been performing exceptionally well. For example, the company's revenue increased a strong 5% in fiscal 2022, which ended in June. Organic sales were even better, up 7%. These are very strong numbers in the generally slow-moving consumer staples space. Earnings rose 6%. Most notably, the company was able to increase prices while at the same time increasing the amount of products it sold and shifting consumers into higher cost products. That's basically the holy grail in the industry.
Procter & Gamble is a good company that has been doing very well. And yet the stock has fallen around 20% so far in 2022.
The problems investors fear
The future, however, appears far less certain thanks to inflation and the real threat of a recession. So far, Procter & Gamble has been able to push through price hikes to cover its rising costs, but it is warning investors that this will likely be harder to achieve in fiscal 2023. Sales growth is projected to slow, costs are still rising, and earnings growth is expected to be more modest in the year ahead. Investors appear to be moving away from the stock, along with many others given the broader bear market, in anticipation of weaker future results.
The question for investors is simple on the surface: Has the stock dropped enough to make it worth buying? A look at the company's historical dividend yield range offers some guidance. This year's price declines pushed the dividend yield up to 2.7%, since yield and price move in opposite directions. That's still below the 3% that is the visual middle-of-the-road rate over the past decade. So the stock doesn't look to be a screaming buy at the current price, despite a notable price decline.
PG Dividend Yield data by YCharts
Looking over a longer time span, since the late 1980s 2.7% is actually toward the higher end of the yield range. But the yield historically topped somewhere above the 3.5% level when times have gotten tough for the company. Most investors would probably be better off waiting until the yield is at least over 3%, with value-conscious investors using 3.5% as the target yield.
The caveat here is that extremely conservative dividend investors more worried about dividend consistency than yield or value wouldn't be making a mistake to buy Procter & Gamble at its current price. The company hasn't achieved Dividend King status (50 plus years of annual dividend growth) by accident -- it places a great deal of importance on providing investors with a safe and growing dividend. You just need to understand that you are paying up for quality, and that there could be some more near-term downside in the price if the economy continues to weaken.
One for the wish list
Given the current backdrop, highlighted by negative economic news and Procter & Gamble's own conservative guidance, most investors should probably keep watching the stock. A drop in the price, pushing the yield to 3% or more, would make it a far more compelling purchase. At a 3.5% yield it would likely be a very strong buy candidate.
Right now, well, safety-first income investors might entertain a purchase if they are focused on ensuring their dividend checks keep rolling in. But that's likely to require some trade offs, including the risk of near-term paper losses as the economic headwinds play out. Not a problem if you think in decades, but not a great call if you have a short time horizon or favor value stocks.
