It's always smart to consider dividend-paying stocks for your portfolio, as these payouts can be powerful wealth boosters. (Really -- they're not just for retirees!) A great place to find some solid contenders is among the Dividend Aristocrats, companies that have raised their payouts each year for at least the last 25 years. Let's get to know one Dividend Aristocrat, Procter & Gamble (NYSE:PG), and see whether this is a good time to invest in the consumer goods leader.
Nuts and bolts
It's unlikely that you haven't heard of Procter & Gamble, as it's been around for 177 years, since 1837. Its market capitalization tops $230 billion, and the company boasts 70 to 80 "core" brands, most of which are familiar to us, including more than 20 billion-dollar products. Think Always, Ariel, Bounty, Braun, Charmin, Crest, Dawn, Downy, Duracell, Febreze, Fusion, Gain, Gillette, Head & Shoulders, IAMS, Mach3, Olay, Oral-B, Pantene, Pringles, Tide, Vicks, and Wella.
Many of its not-quite $1 billion brands are also formidable, including Cover Girl, Mr. Clean, Tampax, Dash, Swiffer, and Cascade.
Why Procter & Gamble is appealing
Why else would someone want to own Procter & Gamble? Well, let's start with a dividend that yields 3.2%. It has upped that payout by an annual average of 10% over the past decade and 8% over the past five years. It's more impressive than that, though. As my colleague Tamara Walsh has noted, "Not only has the consumer goods conglomerate paid a dividend for the past 124 years straight, but it has also increased that dividend for the last 58 consecutive years at a compounded rate of more than 9% a year." Wow. Meanwhile, P&G distributes 69% of earnings to shareholders, leaving room for further dividend hikes.
The company's profit margins are also a plus, with net margin approaching 14%. And the defensive nature of its offerings is also good for investors, offering relative stability in the face of market downturns. A bad economy will put many people off buying that new car, refrigerator, or cruise, but they will keep buying shampoo, toothpaste, detergent, razors, paper towels, and diapers. Procter & Gamble's broad international operations are also a boon, enabling the company to profit from faster-growing developing markets, where people gaining wealth can increasingly buy name-brand goods.
The company isn't standing still, either, as it innovates and rolls out new offerings, such as Always Discreet products for adult incontinence, Crest Sensi-Stop sensitivity-relief strips, Tide detergent pods, Gillette's Fusion ProGlide razor "with New FlexBall Technology," and the SWASH clothing care system. Not every new product is a hit, but some eventually turn into billion-dollar brands.
It's always smart to assess a company's sustainable competitive advantages, and Procter & Gamble has some formidable ones, starting with its scale. Its size gives it power over suppliers and the ability to get prominent placement in stores, as well as cost advantages in manufacturing and distribution. The strength of its brands makes innovation easier when it introduces a new product under a familiar and trusted name, such as a new Gillette razor.
Why you might hold off on Procter & Gamble
Despite all that P&G has going for it, it has also struggled lately, and is in the midst of making some big changes. A.G. Lafley has returned as CEO, and he plans to shed or merge about 100 brands, keeping just 70 to 80 core brands. That sounds quite reasonable when you see that the core brands generate about 90% of company revenue and 95% of earnings. The 100 other brands feature shrinking revenue and earnings. Such changes certainly bode well, but they also reflect some uncertainty.
Over the past five years, revenue has averaged annual growth of 1.3%, while earnings have averaged a 1.6% loss. Management in recent years has cut over $1 billion annually from the cost of goods sold. Still, a growing top line is more valuable than cost savings, and Procter & Gamble has some work to do there. Progress is happening, though: Its last fiscal year featured revenue up 1% and earnings per share rising 4%.
Is it time to buy?
Procter & Gamble has long been a great company to own, with shares averaging annual growth of 14% over the past 30 years – though only 7% over the past decade. This doesn't seem to be the best time to buy in, though, as shares seem fairly to slightly overvalued. The stock's current and forward-looking P/E ratios, 23 and 20 respectively, both exceed the five-year average of 19. Its price-to-sales ratio is also above average.
But keep an eye on this Dividend Aristocrat, as it has a lot to offer, especially at a better price and with its turnaround further underway.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns shares of Procter & Gamble. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.