In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Procter & Gamble (NYSE: PG), which posts a 3% yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

11.5%

Source: Procter & Gamble investor relations.

Procter & Gamble has one of the most enviable dividend track records around, having paid dividends for 120 consecutive years with 54 consecutive years of dividend increases.

Dividend growth has been pretty strong over the past five years, but past returns don't guarantee future results, so dividend history is only 10% of the final grade. Procter & Gamble does, however, score a 5 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

18.4 times

10%

5

EPS payout ratio

50.3%

10%

4

FCFE payout ratio

54.8%

30%

4

Source: Capital IQ, a division of Standard & Poor's, as of Feb. 23.

These are all signs that the current dividend payout is sustainable. The balance sheet is strong (Morningstar gives P&G a credit rating of "AA") and the payout is well-covered by both profits and free cash flow. Additionally, in its latest annual report, P&G stated that the "first discretionary use of cash is dividend payments."

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

50.3%

10%

3

FCFE payout ratio

54.8%

20%

3

Sustainable growth rate

8.3%

10%

4

It doesn't look like Procter & Gamble's consecutive dividend increase streak is in any trouble, though I would expect the growth rate over the next five years to be in the 7-9% range rather than the 11.5% growth of the past five years.

Why? First, the median analyst estimate for long-term earnings growth is 9.5% and P&G has tended to grow the dividend at roughly the same rate as earnings per share. Also, analysts tend to be an optimistic bunch and I'd rather err on the conservative side.

Next, P&G's earnings payout ratio has been climbing, from 39.8% at year-end 2007 to 50.3% today, and it's unclear how much P&G can further increase that ratio without adversely affecting growth.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term
 EPS Growth

Colgate-Palmolive (NYSE: CL)

2.7%

9%

Kimberly Clark (NYSE: KMB)

4.3%

8%

Unilever (NYSE: UL)

3.8%

10%

With its current yield at 3%, Procter & Gamble's dividend yield is in-line with this peer group, so I don't think it's likely that the board will slow growth due to peer pressure.

Pencils down!
With all the numbers in, here's how P&G's dividend scored:

Weighting

Category

Final Grade

10%

History

5

  Sustainability  

10%

Interest Coverage

5

10%

EPS Payout Ratio

4

30%

FCFE Payout Ratio

4

  Growth  

10%

EPS Payout Ratio

3

20%

FCFE Payout Ratio

3

10%

Sustainable growth

4

100%

Total Score (out of 5)

3.9

  Final Grade

B

Procter & Gamble's score has fallen a bit since we last looked at it in July, due primarily to slightly higher payout ratios. It's something to keep an eye on in future reviews of the dividend, but it's certainly no reason to panic.

Want some more dividend ideas? Click here for a free report from Motley Fool expert analysts: "13 High-Yielding Stocks to Buy Today."

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He owns shares of Procter & Gamble. Unilever is a Motley Fool Global Gains recommendation. Kimberly Clark, Procter & Gamble, and Unilever are Motley Fool Income Investor picks. The Fool has a disclosure policy.