The Procter & Gamble Company (PG) is focused on providing branded consumer packaged goods. Procter & Gamble currently sports a 2.8% dividend yield, which is approximately in-line with the current yield on the 10-year U.S. Treasury bond.
However, Procter & Gamble has delivered consistent growth in its dividend, most recently with a 7% increase announced by the board of directors earlier this calendar year. This marks the 57th consecutive year the company has increased its dividend.
Dividend History
Included below are the dividends and growth rates for the past decade, along with Proctor & Gamble's payout ratio:
| Year | Dividend | Dividend Growth | Payout Ratio |
| 2003 | $0.82 | -- | 44% |
| 2004 | $0.93 | 13% | 40.1% |
| 2005 | $1.03 | 11% | 38.7% |
| 2006 | $1.15 | 12% | 43.5% |
| 2007 | $1.28 | 11% | 42.1% |
| 2008 | $1.45 | 13% | 39.8% |
| 2009 | $1.64 | 13% | 45.8% |
| 2010 | $1.80 | 10% | 51.0% |
| 2011 | $1.97 | 9% | 50.1% |
| 2012 | $2.14 | 9% | 68.5% |
| 2013 | $2.29 | 7% | 59.3% |
Procter & Gamble has provided solid dividend growth over the past decade, although the annual growth seems to have slowed in the last few years. Dividends grew at a compounded average annual rate of ~11% for the entire period (2003-2013), but slowed to 9.6% for the last 5-years (2008-2013).
Furthermore, the payout ratio has grown dramatically in 2012 & 2013 compared to where it had been. Yet despite this increase, Procter & Gamble's dividend continued to grow at a single-digit rate. In general, the payout ratio has been trending higher, while the growth in the dividend has been trending lower - not a reassuring sign. This is definitely an area investors should do a deeper dive and then adjust their assumptions based on their findings.
Return On Equity & Future Growth
In addition to looking at historical growth and payout ratios for the dividend, analyzing Procter & Gamble's return on equity performance may also provide some clues as to what future dividend growth may look like.
On average, Procter & Gamble has provided an average ROE of 19% over the past 5-years (2009-2013).
PG Return on Equity (TTM) data by YCharts
Using the current payout ratio (retention rate = 41%) and ROE (19%), we can estimate potential earnings growth. Holding these numbers constant would give you an estimate of 8% earnings growth going into the future. This appears to reinforce the slowing growth rate we have seen over the past few years.
Dividend Discount Model
Using the dividend discount model, I determined the value of Procter & Gamble based on its future dividend payments. In performing this valuation, I made several assumptions.
- First, I used 8% as my discount rate, based on the long-term average return of the stock market
- Next, I used Procter & Gamble's FY 2013 dividend ($2.29) as the base to apply future growth rates to
- I applied an 9% growth rate for the first five years (2014-2018), an 8% growth rate for 2019-2021, and a 7% growth rate for 2022 & 2023
- Finally, I assumed a 3.5% perpetuity rate after 2023
Based on these assumptions, I calculated that Procter & Gamble's intrinsic value is ~$78 per share. At the current price of $84 per share, the stock seems to be fairly valued to slightly over-valued, and offers very little margin for error. So investors should pay close attention to their growth assumption and make adjustments based on their own outlook.
Overall, Procter & Gamble seems fairly priced for total return oriented investors that are interested in dividend growth, given that the current price is within 7% of my calculations. Therefore, long-term investors may want to give Procter & Gamble a closer look to see if it should be included in their portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the dividend growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for their specific situation.
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