Shares of Procter & Gamble (PG 0.60%) have had an unremarkable 2022, dropping some 20% -- about the same as the S&P 500 -- this year. But the company's actual business performance should please investors. The consumer goods behemoth has been growing sales and earnings in a difficult environment, and its dividend continues to enrich shareholders.
Let's take a look at why P&G is one of the strongest dividend stocks on the market today.
Inflation-proof business
Procter & Gamble's latest earnings results show why many investors see it as an inflation-resistant stock. Sure, there were huge pressures associated with slowing demand in key markets like the U.S. and China through late September. P&G also faced big headwinds from a strengthening dollar.
Look closer and you'll see evidence of impressive pricing power. Procter & Gamble hiked average prices by 9% in the fiscal first quarter as it passed along rising costs on inputs, transportation, and labor. This boost only sparked a modest decline in volumes, so that overall organic sales rose 7% to match the solid growth pace that investors saw over the previous 12 months.
P&G also cut costs in other areas of the business, so that its operating profit margin held steady after accounting for currency exchange rate shifts. The company continues to lead the industry on this core metric.
PG Operating Margin (TTM) data by YCharts
Cash flow
Investors have little to worry about when it comes to the resources that fund Procter & Gamble's solid dividend. The company converted nearly all of its earnings into free cash flow last quarter, for example. That metric stood at $3.54 billion in the second quarter, or 86% of earnings.
This success allowed P&G to keep a growth-focused approach to the business even though parts of the industry were under extra stress. CEO Jon Moeller said in a press release, "We delivered solid results in a very difficult cost and operating environment."
Management said they continue to invest aggressively in areas like product innovation, packaging, and marketing.
The next dividend increase
That environment might get worse before it gets better. Procter & Gamble is projecting a bigger drag on earnings from cost spikes and an appreciating U.S. dollar, in fact. Yet the business is still on track to grow organic sales by around 4% in 2022 compared to 7% last year. Earnings growth remained on target, too, after accounting for currency exchange rate swings.
P&G will pay around $9 billion in dividends in fiscal 2023 and is expecting to spend nearly as much on stock buybacks. That annual dividend payout is sitting at $3.65 per share today after having increased by 5% last year. Given how well Procter & Gamble's profits are holding up, and its prospects for continued growth on top of the past few years' gains, it is likely that the company will announce another solid dividend increase in April of next year.
The Dividend King has hiked its dividend in each of the past 66 years, after all, and investors have every reason to expect that streak to continue.
