Perhaps the most lucrative advice to investors is that there are no grand and convoluted secrets to becoming a successful investor. On the contrary, becoming wealthy isn't complicated; investors should invest in the best companies as soon as possible and hold them for the long haul.
But how do you distinguish a high-quality business from a terrible one? Decades of consecutive dividend growth is a good place to start. This is because steady dividend growth also requires reliable growth in earnings, which is something only the best companies can sustain.
With 66 consecutive years of dividend growth under its belt, Procter & Gamble (PG 0.54%) is among just 43 stocks that qualify as Dividend Kings (i.e., they've had 50 or more straight years of dividend growth). But is the stock still a buy for dividend growth investors? Let's delve into P&G's fundamentals and valuation to figure that out.
Procter & Gamble's brand portfolio is second to none
P&G's $335 billion market capitalization makes it larger than its next four household & personal products industry competitors combined. Unsurprisingly, the underlying reason for the company's massive size is its unmatched portfolio of consumer brands. P&G's portfolio is loaded with billion-dollar brands, including Dawn dish soap, Gillette razors and shaving products, Head & Shoulders shampoo, and Bounty paper towels. Due to the company's extensive product offerings, approximately 5 billion consumers around the world use its products.
P&G's net sales moved 1% lower year over year to $20.8 billion during the second fiscal quarter of 2023 ended Dec. 31. What was behind the decline in net sales for the quarter?
P&G's organic sales increased 5% over the year-ago period in the second quarter. The company's recent implementation of price hikes throughout its businesses lifted organic sales 10% year over year. And because consumers are so accustomed to using P&G's products, volume only dipped 6% as a result of higher prices. The below-average drop in more expensive healthcare business products explains how a favorable product mix increased organic sales by 1% during the quarter.
Unfortunately, P&G's sales presence in 180 countries proved to be a double-edged sword for the second quarter. Recent strength in the U.S. dollar against most other foreign currencies resulted in a 6% foreign currency translation headwind in the quarter. These factors are what led to the slight decrease in net sales during the quarter.
P&G reported $1.59 in non-GAAP (adjusted) diluted earnings per share (EPS) for the second quarter, which was a 4.2% year-over-year decline. A 2.2% increase in cost of products sold contributed to a 120-basis-point dip in non-GAAP net margin to 18.9% in the quarter. P&G was unable to offset this reduced profitability with a 2.5% reduction in its diluted share count via share buybacks. This is why core diluted EPS fell at a faster rate than net sales during the quarter.
As inflation gradually tapers down, P&G's profitability should recover. This is why analysts believe that the company will deliver 5.1% annual core diluted EPS growth over the next five years. For context, this is a tad less than the household and personal products industry average growth outlook of 5.7%.
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A secure, market-topping dividend
P&G's 2.6% dividend yield is significantly above the S&P 500 index's 1.7% yield. And this doesn't come with the sacrifice of future dividend growth, either.
That's because P&G's dividend payout ratio is poised to clock in around 62% for the current fiscal year set to end in June. This payout ratio is attractive for two reasons: One, it builds a cushion into the dividend so that it can continue to be paid during a temporary decline in profits. Two, P&G can keep enough of its earnings to invest in future growth and repay debt to strengthen the business. This is why I expect plenty more mid- to high-single-digit annual dividend growth for the foreseeable future.
The stock remains buyable
P&G is the proverbial slow and steady tortoise that eventually wins the race. And the valuation doesn't currently appear to be unreasonable.
P&G's forward price-to-earnings (P/E) ratio of 22.5 is under the household & personal products industry average forward P/E ratio of 28.8. Even considering the minimal growth advantage that the industry has on P&G, the stock's valuation multiple is arguably a bit too low at the current $141 share price. That's why the stock still looks like a buy for income investors.
