Procter & Gamble Co’s Dividend Keeps Climbing Higher
If you like complicated trading strategies with fancy charts or exotic mining companies searching for gold in the Congo, then Procter & Gamble Co (NYSE:PG) is not for you.
But if you like good ol’ fashioned dividend stocks, then you’ll like this name just fine.
Since 1956, the company has bumped its dividend for 60 consecutive years—through wars, recessions, and assorted other financial shocks. We’re at the point where any normal Joe can see these hikes coming—even a dummy like me. (Source: “P&G Declares Dividend Increase,” P&G Investors’ Relations, April 8, 2016.)
In my regular dividend column, I predicted P&G would raise its dividend this month. I was even willing to bet a year’s supply of Tide to anyone here in the office.
Sure enough, on April 8, the company hiked its quarterly payment to $0.6695—a one-percent bump. Based on Friday’s closing price of $82.30 and the new annual dividend of $2.68, the stock now yields a tidy 3.3%. (Source: Ibid.)
The No. 1 Dividend Stock for 2016…and Beyond
Sadly, nobody took me up on my wager. But as an income investor, I won’t complain.
P&G is exactly what I look for in a dividend stock: a simple business with a big competitive advantage and a track record of distribution increases. A shareholder-friendly management team is also a big plus.
Crest, Tide, Bounty, Gillette, Febreze, Mr. Clean, Nice ‘n Easy: P&G owns so many brands, almost every household in America has at least one stocked somewhere. You could hardly think up a more boring product lineup, but it’s exactly what I look for in a business.
What are the chances people will continue brushing their teeth or cleaning the dishes over the next century? Very high—nearly a sure thing. For this reason, P&G is one stock that will likely be cranking out dividends for decades to come.
In my years of investing, I’ve found that it’s not the hot startups or the risky biotech stocks that earn the best returns. Rather, the most successful companies are the ones that we see every day. The businesses so ingrained in our lives, it would have a big impact if they disappeared tomorrow.
Better yet, consumer brands like Procter & Gamble tend to be capital-efficient. They don’t tend to spend much on technology or building costly new factories. Their loyal customers are willing to pay a big premium over cheaper substitutes.
If you buy your kids Crest toothpaste, you’re not going to switch brands. Your child’s health is an important decision. As long as Crest delivers the same top-notch product, most people will pay an extra dollar or so.
Even if you wanted to compete, chances are you couldn’t. The cost to build a brand on par with Bounty or Oral-B would run in the tens of billions of dollars. Even if you had the money, chances are slim you could win over die-hard customers.
As a result, Crest, and all of the company’s other brands, are able to crank out oversized profits year after year, most of which is passed right on to shareholders.
Last year, the company spent $1.8 billion in share buybacks and $7.3 billion in dividends. Over the past five years, management has returned over $60.0 billion to investors. (Source: “Procter & Gamble (PG) Q2 2016 Results – Earnings Call Transcript,” Seeking Alpha, January 26, 2016.)
This could just be the beginning. Last quarter, Chief Financial Officer Joe Moeller announced Procter & Gamble would pay out over $70.0 billion to shareholders over the next four years. Translation: brace yourself for many more dividend hikes in the years to come. (Source: Ibid.)
These small, steady payout hikes really add up over time.
If you had bought P&G in 1996, your original yield on investment would be around 3.1%. Over that time, the company has increased its payout six-fold. If you had held your shares and reinvested all of your dividends, your yield on cost today would be over 20.6%.
Source: P&G Investor Relations
What if we play out this investment for another 20 years? Assuming Procter & Gamble can continue to increase its dividend by three percent per year, the stock will pay out $1.20 per year by 2036. This represents a yield on your original investment of 37.0%.
Of course, Procter & Gamble Co is no slam-dunk.
Growth has been disappointing. No longer is the company building new businesses or conquering untapped markets. Rather, management has spent the past few years pruning its brand portfolio.
That said, these brands have been underperforming for years. Trimming the business is a healthy process. Ultimately, this will leave a smaller but more profitable company.
The dour mood could also be a win for new investors. P&G stock has always traded at a rich multiple. But with shares in the doldrums, we’re being presented with a once-in-a-lifetime opportunity to pick up the stock on the cheap.
The Bottom Line on Procter & Gamble
Investing doesn’t have to be hard.
Buy a few good businesses. Reinvest the dividends. Hold on for the long haul. Today, thousands of ordinary investors are using this method to grow their wealth.
Procter & Gamble is not, to use the proper Wall Street lingo, sexy. The company, though, is a wonderful business that will likely be cranking out dividends for decades to come. That’s why it may deserve a permanent place in any income portfolio.