Portfolio Update
The FiveTwenty portfolio received no dividends in the past week.
| Past Week Dividend | $0 |
| Current Quarter Dividend (Q2 2021) | $0 |
| LifeTime Dividend | $113.04 |
| Estimated Annual Dividend | $1,255.12 |
The capital allocation for the week of 04/18/2021 to 04/24/2021 will be used to establish a position in Procter & Gamble (NYSE: PG).
PG – Company Profile
Procter & Gamble (PG) provides branded consumer goods in more than 180 countries. It operates in five segments: Beauty; Grooming; Health Care; Fabric & Home Care; Baby, Feminine & Family Care. Among PG’s well known brands are: Pampers, Luvs, Tide, Gain, Bounty, Charmin, Puffs, Gillette, Head & Shoulders, Old Spice, Dawn, Febreze, Swiffer, Crest, Oral-B, Scope, and Olay. Official Site | Wikipedia
| Dividend Streak | 65 years |
| Yield | 2.30% (MRD 2.53%) |
| Payout Ratio | 56.42%* (GAAP 59.73%) |
| P/E | 24.50* (GAAP 25.95) |
* computed using TTM adjusted EPS of $5.60 as of Q2 2021
Financials
Does PG have the financial means to sustain and raise its dividend going forward?
Over the last decade, PG’s revenue has dropped from $81.1 billion to $70.9 billion. GAAP net income was more or less flat over the period. However, the seemingly poor financial performance is due to the major transformation the company went through between 2014 and 2017. During that time period the company sold off or discontinued 105 low-margin, low-growth brands. Following the reorganization, PG is better positions for future growth as evidenced by a return to top line growth starting in FY 2017.
In the last 10 years, GAAP EPS for PG have shown the same volatility and stagnation as GAAP net earnings in large part due to the company’s restructuring from 2014 to 2017. Adjusted EPS, referred to as core EPS in PG’s annual reports, showed a more consistent growth trend. Furthermore, adjusted EPS growth has accelerated starting in 2016. Adjusted EPS growth at PG was driven by both an increase in sales as well as a robust share repurchase program.
The average dividend per share growth rate was 5.0% per year in the past 10 years and 3.9% per year in the past 3 years. (per GuruFocus) Furthermore, the payout ratio hit a high of 72.48% in 2016 but has since come down to 59.18% for 2020.
On 4/14/2021 PG announce an increase of 10% to it’s quarterly dividend to $0.87 per share from$0.79. This marks the 65th consecutive year of dividend increases for the company.
PG in 2020 and beyond
PG’s fiscal year runs from July to June. In FY 2020, which covered the period of July 2019 to June 2020, the company saw a 6% increase in organic sales and 13% growth in core (adjusted) EPS. Additionally, PG returned $15.2 billion of value to shareholders in the form of dividends and share repurchases. COVID-19, which impacted the last 2 quarters of FY 2020, did not have a material impact on financial performance. However, it did have offsetting impacts during the period. Health, hygiene and cleaning products did experience higher demand especially in North America, while sales decreases due to economic slowdown and lockdowns in certain regions and product categories.
The strong performance from FY 2020 has continued during the first 2 quarters of FY 2021. Revenue grew 9% in Q1 2021 and 8% in Q2 2021 compared to the previous year, while Core EPS grew 19% and 15%. Furthermore, for FY 2021 PG is forecasting revenue growth of 5-6% and Core EPS growth of 8-10%. Additionally, the company plans to return around $18 billion of cash to shareowners (~$8billion in dividends and the rest in the form of stock repurchases).
Valuation
Are we paying too much for PG at the current share price?
In the last 10 years, PG’s P/E ratio saw a low of 14.48 and a high of 88.4, with a median value of 21.49. (per GuruFocus) The current TTM P/E ratio of 25.95 is slightly above the historical media.
The current share price of $137.25 is 5.3% above the 50-day moving average and 2% above the 200-day moving average. Additionally, the share price is near the 75th percentile of the 52 week trading range.
Even though the current TTM PE ratio for PG is slightly higher than the historical media, it is in line with the PE ratio PG has traded at for the last year. Due to the companies strong recent performance we feel comfortable with this slightly elevated valuation.
Yield
How does the current dividend yield for PG compare to historical values?
PG’s dividend yield has been in a range of 2.13% to 3.82%, with a median of 3.02%, over the last 10 years (per GuruFocus) The current TTM yield of 2.3% is below the historical median.
The dividend raise announced on 4/14/2021, brings the field closer to the historical median at 2.53%. We are comfortable initiating a position in PG at the current yield.
Thesis
Why are we adding PG to the FiveTwenty portfolio?
PG has an impressive track record of 65 years of consecutive dividend increases. Additionally, due to its roster of strong consumer brands, PG has now performed well during the “great recession” as well as the COVID-19 pandemic. Furthermore, the reorganization completed in 2017 seems to be working.
We expect PG to continue to be a safe source of dividend income for many years into the future.
Additional Research
Photo by Brett Jordan on Unsplash
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