For years, Procter & Gamble (PG 0.32%) has been a favorite stock among dividend investors.
The consumer staples giant is nearly 200 years old. It's diversified across multiple household product categories like cleaning, grooming, health, and beauty, and it owns well-known brands like Tide laundry detergent and Gillette shaving products.
The company's bona fides as a dividend stock are also impeccable. It's a Dividend King, having raised its quarterly payout every year for 66 years, and it's paid a dividend every year for 132 years.
However, P&G's latest earnings report shows why income investors may want to look elsewhere for dividends right now.
Image source: Getty Images.
Stretching the elastic
Investors turn to defensive stocks like Procter & Gamble because consumers purchase their products regardless of the state of the economy. However, even P&G is feeling some headwinds in the current economy.
Revenue at the consumer products giant fell 1% in its fiscal second quarter to $20.8 billion, though it rose 5% on an organic basis, which adjusts for currency exchange. That result was in line with analyst estimates at $20.73 billion.
On the bottom line, the company also matched the analyst consensus with earnings per share at $1.59, which were down 4% from the quarter a year ago.
Given the expectations, the modest decline in sales and profits was expected due to the stronger dollar and other headwinds, but digging into the numbers shows that the company is more vulnerable than it seems.
P&G raised prices aggressively during the quarter, up 10%, but volume fell significantly with organic volume down 6%, which explains why the price increases were not enough to deliver growth in revenue.
On the earnings call, the company said that the decline in volume was driven by market contraction, trade inventory reduction, portfolio reduction in Russia, and COVID-19 lockdowns in China. In other words, it has fewer end customers, and its retail customers are paring elevated inventory levels. Management said that the consumption-related decline was 3 percentage points, which is what the company had expected to be the impact of its price hikes.
The company noted that it actually gained volume share in the U.S. and some of its other major markets, but the overall consumption-related decline shows that the company may be reaching a ceiling with its price hikes or the limits of its price elasticity. There are generally two ways a company like Procter & Gamble can grow revenue. It can sell more product or raise prices. It's much more sustainable to grow revenue by adding customers and selling more product as customers will eventually push back on higher prices.
Notably, the 10% increase in prices wasn't enough to overcome higher commodity costs as increases in key inputs and higher freight costs lowered gross margin by 160 basis points to 47.5%. The company did raise its full-year guidance slightly. For revenue, it sees flat-to-down-1% performance; for EPS, it expects flat-to-up 4% result.
Is this dividend stock a keeper?
Because of its status as a consumer staples company and its reputation for steadily raising its dividend, P&G stock trades at a premium price-to-earnings (P/E) ratio of 25 -- above the S&P 500's P/E of 20. That seems like a steep price to pay for a stock in a slow-growth sector that essentially sees no growth this year and may be facing more pushback on its prices if the global economy falls into a recession.
Packaged food companies like Coca-Cola and PepsiCo have benefited from higher prices and a rebound in restaurant demand, and even most big-tech stocks, including those in the FAANG group, trade at a lower valuation. While P&G may be doing its best to overcome the current headwinds, investors can probably find better dividend stocks elsewhere.
