In many aspects of life, slow and steady often wins the race. This mantra can also be applied to investing and building wealth. Simply investing in the most established and respected companies is a way to generally avoid losses that are insurmountable (i.e., bankruptcy).
Because it's one of the most popular consumer staples companies in the world, Procter & Gamble (PG +0.37%) is unlikely to see its stock go to zero. But is the stock a buy for yield-oriented investors seeking to build wealth? Let's delve into P&G's fundamentals and valuation to address this question.
NYSE: PG
Key Data Points
P&G has a portfolio loaded with leading brands
If you looked at the labels on various products in your household, it's a safe bet that you probably have at least one manufactured by Procter & Gamble. With a customer base of approximately 5 billion individuals, its vast portfolio of products are consumed by a clear majority of the world's population. The company's best-selling products include Crest toothpaste, Charmin toilet tissue, Tide clothing detergent, Pantene shampoo, Gillette razors, Cascade dishwasher detergent, Downy fabric softener, Luvs diapers, and Secret deodorant.
P&G's net sales edged 3.5% higher year over year to $20.1 billion during the fiscal 2023 third quarter (ended March 31). What led to this solid growth rate in the quarter?
Price hikes contributed 10% growth in its net sales for the quarter. Given that the company's products enjoy significant brand recognition and customers aren't that receptive to substitutes, volumes fell just 3%. An increasing sales mix of higher-priced healthcare products chipped in 1% to net sales growth in the quarter.
One headwind was P&G's global sales presence which turned negative because of the strength of the U.S. dollar during that time. Thus, the company's net sales dipped 4% year over year due to unfavorable currency exchange for the quarter.
| Metric | Q3 2022 | Q3 2023 |
|---|---|---|
| Net margin | 17.3% | 16.9% |
Data source: Procter & Gamble Q3 2023 earnings press release
P&G's adjusted diluted earnings per share (EPS) increased 3% over the year-ago period to $1.37 in Q3. Due to a higher effective tax rate than the year prior, the company's net margin dipped by nearly 40 basis points in the quarter. The company's reduced profitability couldn't be fully offset by a decline in its diluted share count from share repurchases, which explains how core diluted EPS growth trailed net sales growth for the quarter.
Slowing inflation, a robust product portfolio, and a more favorable sales mix should all bode well for P&G. This is why analysts believe that the company's core diluted EPS will have a compound annual growth rate of 5.4% through the next five years. For context, this is below the average earnings growth outlook of 6.9% for the household and personal products industry.
Image source: Getty Images.
The payout can keep growing
P&G's 2.4% dividend yield is meaningfully more than the S&P 500 index's 1.7%. Better yet, the company's 67 consecutive years of dividend growth and its resulting status as a Dividend King don't appear to be in any jeopardy of ending anytime soon.
P&G's projected dividend payout ratio will come in at just under 63% for this fiscal year (scheduled to end in June). This lets the company retain the capital needed to seize upon growth opportunities, reduce debt, and execute share buybacks. That is why I am confident that the dividend can continue to grow as fast as earnings in the years ahead.
A dividend stock worth watching
Share prices of P&G have rallied 10% in the last three months, which pushed the company's forward price-to-earnings (P/E) ratio up to 24.6. That's below the average forward P/E ratio of 30.5 for the household and personal products industry. But given P&G's more modest growth prospects compared to its sector, the company's valuation multiple should be less.
The stock's current $156 share price isn't necessarily a poor entry point for conservative income investors. But for investors seeking more value for their dollar, I would advise waiting for a stock price pullback before considering any major purchases.
