Warren Buffett started out looking for deep value but then shifted toward paying reasonable prices for great companies. It's not a bad plan, based on the Oracle of Omaha's long-term track record. Keep that in mind when you look at consumer-staples giant Procter & Gamble (PG 0.19%). Here's why you might want to buy the stock and why you might want to wait. And if you own it, you probably shouldn't sell it.
Why you'd want to own P&G
Procter & Gamble controls some of the most iconic consumer-staples brands in the world, including Bounty, Crest, Tide, and Pampers, among many others. If you've been to a grocery store, you've seen, and probably purchased, one of the company's products. With a $370 billion market cap, it's quite literally among the largest companies in the global staples category.
Image source: Getty Images.
This gives P&G notable scale advantages. For example, it has a powerful marketing department, extensive distribution prowess, and the cash and resources to invest in research and development so its brands remain in industry-leading positions. Most of its products, meanwhile, occupy the high end of the price spectrum in the categories they serve, leading to strong profit margins. It's a vital partner for retailers that appreciate the company's ability to grow a product category with innovation.
The best way to highlight Procter & Gamble's long-term success is by taking a look at its incredible dividend streak. A Dividend King, it has increased its dividend payment annually for 67 years and counting. The average annualized increase over the past decade was a solid 5%. A company can't achieve a record like that by accident. It requires consistent, and successful, execution of a good strategy. To be fair, like all companies, P&G's fortunes have waxed and waned over time, but the focus on building for the long term has, so far, always worked out in the end.
This is the type of company that you buy and hold on to forever. In other words, if you own it, don't sell it. But knowing why you'd want to keep owning a stock doesn't necessarily tell you if you should buy it at any given moment in time.
Is P&G a buy right now?
Warren Buffett's plan is to buy great companies at reasonable prices, which actually harks back to Benjamin Graham, one of his mentors. Graham often noted that even a great company can be a bad investment if you pay too much for it. This is the question you have to answer for Procter & Gamble today.
NYSE: PG
Key Data Points
To state things clearly: P&G is not cheap right now. The price-to-sales, price-to-book value, and price-to-cash flow ratios are all above their five-year averages. The price-to-earnings ratio is below its longer-term average, but there was an odd year with an extra-high P/E, so that average is a bit skewed at the moment. If you are a dyed-in-the-wool value investor, you'll probably want to put Procter & Gamble on your wishlist just in case there's a deep drawdown. But you won't want to hit the buy button.
Yet if you consider some alternative valuation measures, P&G doesn't look overly expensive, assuming you're willing to pay full price for a great company. For example, the dividend yield is near a low point over the past decade, but looking further back shows it's about middle of the road, historically speaking. That suggests a fair valuation, noting the very long list of positive attributes it possesses. If you care about reliable dividend growth, the current 2.4% yield might be worth it to you.
PG Dividend Yield data by YCharts
You can also consider price-to-forward-earnings. But instead of looking only at the past (as the normal P/E ratio does), forward earnings takes into consideration the future. It's based on what analysts expect to happen ahead over the near term. This measure is slightly below average for the past five years. Once again, the takeaway here isn't that P&G is cheap, but that it seems like it could be reasonably priced. And that's not a bad deal if, like Buffett, you want to own great companies forever.
A fair price can be a good choice for a well-run company
To be clear, Procter & Gamble is not a screaming buy today. The decision to purchase it requires a more nuanced view of the situation. The stock is, at best, fairly priced. But it has an industry-leading position and a long-term track record of success that is impressive. Paying full price to add a great company to your portfolio isn't a bad option for most investors. That's particularly true if you're looking to create a reliable dividend stream for retirement.
