Procter & Gamble (P&G) (PG 0.12%) has long served as a mainstay for more conservative investors. Since its founding over 180 years ago, it has produced popular, recession-resistant consumer staples, such as Bounty paper towels, Oral-B toothpaste, and Tide laundry detergent. These have fostered brand loyalty and supported 67 consecutive years of dividend increases.
However, the stock sell-off that led to a 25% decline in P&G stock has mostly reversed itself. Given the current state of Procter & Gamble stock, investors should ask if they missed a buying opportunity.
The Procter & Gamble report
P&G's report for its fiscal 2023's third quarter (ended March 31) offered mixed results. In the first nine months of fiscal 2023, the company saw revenue of just over $61 billion, a 1% gain from year-ago levels.
Although rising costs and foreign-exchange-related expenses led to significant headwinds, Procter & Gamble offset the challenges successfully through price increases. Consequently, net income for the first three quarters was just over $11 billion, a 4% reduction, compared with the same period in fiscal 2022.
That left Procter & Gamble with $9.4 billion in free cash flow for the nine-month period, a significant drop from year-ago free cash flow of $10.8 billion. Fortunately, the company could still cover the $6.7 billion cost of its payout in that time frame.
The dividend, which pays shareholders $3.76 per share annually, yields a 2.4% cash return. And with 67 consecutive annual payout increases, the Dividend King is one of the more stable dividend stocks in the S&P 500.
P&G's stock enjoyed a 4% bump following its April 21 earnings report. That continued the stock's move higher since it reached an intra-day low of just over $122 per share in October.
Assessing the stock
Unfortunately for new buyers, the company's stability comes at a significant cost. The stock trades at a price-to-earnings ratio (P/E) of 27. Although it's not the most expensive consumer staples stock, some of its main rivals sell for notably lower multiples.
PG PE Ratio data by YCharts.
Shareholders may overlook such a valuation for companies that consistently produce double-digit earnings growth. Still, with earnings growth mired in the single digits even when it's positive, the valuation seems pricey.
Moreover, conditions are such that even dividend investors may want to rethink Procter & Gamble. Indeed, the streak of payout increases makes it one of the top dividend stocks, and its 2.4% cash return exceeds the S&P 500 average of just under 1.7%. Still, several dividend-paying stocks, each with a decades-long history of annual dividend increases, offer higher yields.
Furthermore, despite significant brand loyalty, shareholders need to remember that most of P&G's products hold a tenuous competitive moat. Competitors can copy products such as detergent or toilet paper with relative ease, and high inflation may prompt consumers to look at alternatives.
Today, this competition isn't limited to other consumer staples companies such as Kimberly Clark, Colgate-Palmolive, or budget-friendly alternatives. With entrepreneurs able to sell online more easily, small businesses can also compete more effectively against the consumer staples stock.
It's probably too late to buy P&G stock
Procter & Gamble is a storied name in the consumer goods industry. And its recent ability to compensate for rising costs through price increases speaks to the strength of its brands. Plus, its rock-solid financial condition probably makes it a dividend stock one can safely hold for decades.
Nonetheless, investors can earn safe, higher cash yields in other dividend stocks. And with P&G stock trading at 27 times earnings, investors can likely find conservative, lower-cost stocks that will deliver higher returns.
