2025 has featured no shortage of news items, from new all-time highs in the major stock market indexes in February to tariffs and trade tensions, a swift and brutal drawdown across many top stocks, a rapid recovery, and now Middle East uncertainty.
Volatility is a good reminder of the importance of holding quality companies in your portfolio that you are confident in holding even when faced with the unexpected. Procter & Gamble (PG -0.99%) is one of the largest and most well-run consumer staples companies. The dividend stock has pulled back recently and is now hovering around a 52-week low.
Here's why the sell-off is a buying opportunity for investors looking to generate reliable passive income.
Image source: Getty Images.
1. Competitive advantages
The best consumer staples and packaged goods companies have a portfolio of well-managed and well-known brands that can lead to high margins and sustained growth. P&G has several leading brands across beauty, grooming, healthcare, fabric and home care, and baby, feminine, and family care. Because its brand lineup is so strong, P&G has enjoyed immense success expanding its brands internationally. In fact, P&G's international sales exceed its domestic sales.
P&G does a masterful job of leveraging its global supply chain and marketing to ensure that it benefits from diversification. Too often, multinational companies with many brands can depend too much on a handful of brands to drive margin growth and get bogged down by underperformers.
However, what separates P&G from the competition is that it focuses more on expanding its existing brand lineup than overly relying on acquisitions. Relative to its size, P&G hasn't made a blockbuster acquisition since buying Gillette 20 years ago for $57 billion.
2. Growing cash leads to growing dividends
P&G's growth has been fairly mediocre in recent years. But the quality of the company's earnings is unmatched in its industry.
PG Operating Margin (TTM) data by YCharts
As you can see in the chart, P&G has steadily expanded its margins and free cash flow (FCF) per share, which supports its growing dividend. In April, P&G increased its dividend for the 69th consecutive year -- giving it one of the longest streaks among companies that have raised their dividends for at least 50 years (known as Dividend Kings). Despite that track record, P&G only yields 2.6% -- partially because the stock has been a long-term winner with a 167% total return (capital gains plus dividends) over the last decade.
While there are plenty of other value stocks in the consumer staples sector with higher yields than P&G, few companies compare when considering the quality of earnings growth and the full scope of the capital return program.
As mentioned, P&G generates far more FCF than it needs to pay dividends. So, it has plenty of dry powder to repurchase its stock consistently. Buying back stock brings down the share count and boosts earnings per share. In the last five years, P&G has decreased its share count by 5.5%, and by 13.6% over the last decade.
Thanks to the power of buybacks, P&G has four levers it can pull to grow earnings -- sales volume growth, price increases, operating margin expansion, and stock buybacks.
3. P&G is a fair value
P&G commands a premium valuation relative to other companies in its sector because it is an industry leader in many different consumer categories and has a track record of steady earnings, FCF, and dividends.
One glance at P&G's price-to-earnings (P/E) ratio of 26.3 may suggest that the stock is overvalued compared to other options. But look closer, and P&G is a fair price.
PG Price to Free Cash Flow data by YCharts
P&G's P/E and price-to-FCF ratios are right around five-year median levels. And its forward P/E suggests P&G could begin to look cheap if the stock price stagnates and earnings continue climbing higher.
A balanced buy for risk-averse investors
There are far cheaper stocks than P&G with higher yields. So, P&G definitely isn't a good fit for folks looking for bargain-bin passive income options.
However, P&G could be a foundational holding for investors looking for a company they can count on even during economic downturns and geopolitical uncertainty.
P&G has seen quarterly fluctuations in volume growth and pricing power. But overall, it has done an impeccable job managing consumer spending weakness, especially considering many of its peers are facing eroding margins.
Add it all up, and P&G is an excellent choice for investors who value dividend quality over quantity.
