- Despite rising freight and commodity costs, the consumer staple fared well in its most recent quarter.
- Prble’s dividend payout ratio of 60% should allow healthy future dividend growth.
- The stock is trading at a valuation below its industry average, which makes it a buy.
It’s often been said that a rising tide lifts all boats. This was the case for many (but not all) stocks on the S&P 500, which surged 27% in 2021.
One stock that was lifted as a result of the financial ble (NYSE:PG) , which has raised its payout annually for 65 straight years. Even though the stock was up 18% in 2021, I believe it is still a buy. Here are three reasons why.
1. P&G’s business is chugging along
After generating 7% year-over-year revenue growth to $76.1 billion in its last fiscal year ending June 30 and 11% non-GAAP (adjusted) diluted earnings per share (EPS) growth to $5.66, Prble (P&G) got off to a solid start in its new fiscal year.
P&G reported $ billion in net sales during its first quarter, which represents a 5.3% growth rate against the year-ago period. This topped the analyst consensus of $ billion for the quarter. But how did P&G do it?
P&G was able to record 4% organic net revenue growth during the quarter, which was driven by a 2% increase in volume, 1% increase in pricing, and a favorable sales mix of 1%. P&G’s 2% increase in volume despite a slight increase in its pricing demonstrates its pricing power, which means the company can probably make further price hikes to consumers to offset rising costs. P&G’s pricing power comes from having leading brands that consumers prefer, such as its Tide laundry detergent, Crest toothpaste, and Bounty paper towels. The 1% favorable sales mix refers to the growth in P&G’s healthcare segment, whose products have higher-than-average selling prices. The remaining 1% of revenue growth was the result of favorable currency translation.
Despite Prble passing little of the increased commodity and freight costs on to consumers in the quarter, the company remained quite profitable. As a result, P&G’s non-GAAP diluted EPS declined only 1.2% year over year to $1.61 for the quarter. This was just ahead of the analyst forecast of $1.59 in non-GAAP diluted EPS during the quarter.
Given the decent start to its fiscal year, P&G management is forecasting 3% full-year sales growth at http://paydayloansohio.net/cities/bainbridge the midpoint and 4.5% non-GAAP diluted EPS growth for the year at the midpoint. Given the challenging inflationary environment, I would argue that this is satisfactory growth for the company. And P&G’s resilience in difficult operating environments due to its brand power is precisely why analysts are projecting 7% annual earnings growth over the next five years.
P&G appears to be steadily growing. But is the dividend payout ratio low enough to withstand a temporary downturn in its earnings power?
Assuming a 6.9% raise in P&G’s quarterly dividend, raising it to $0.93 per share, the company will pay $3.54 in dividends per share this fiscal year. Against the $5.92 in non-GAAP diluted EPS that analysts are expecting this fiscal year, this would equate to a 59.8% payout ratio. P&G’s payout ratio near 60% strikes an appropriate balance between rewarding shareholders in the present with a market-beating 2.1% dividend yield while also investing to generate future earnings growth.
3. P&G is a reasonably valued blue-chip stock
P&G is a fundamentally strong stock. But is the stock trading at a valuation that justifies buying it at the current $165 share price?
P&G is priced at a forward P/E ratio of 25.7, which is moderately lower than the household and personal products industry average of 32. At a glance, this suggests that the stock is attractively valued compared to its peers. However, I believe it’s important to also look at a company’s growth prospects versus its industry to gauge whether it is undervalued. P&G’s 7% annual earnings growth is in line with the industry average.
If investors are looking for a high-quality dividend stock trading at a sensible valuation, I believe they would do well to consider buying P&G at its current price.