PG Dividend – Slowing Or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Procter & Gamble (NYSE: PG) is in most homes in some way. The company produces such iconic brands as Crest, Head & Shoulders, Tide, Pampers, and others. When I first became interested in investing I read Peter Lynch's two books “Beating The Street” and “One Up On Wall Street”. If you got nothing else from these books it was this: buy what you know. This mantra has been repeated over and over by countless investors. What better way to buy what you know, than to buy stock in a company that produces many of the things we use everyday? However, some would argue that Procter & Gamble is too ubiquitous and that its best days are behind it. Let's look specifically at Procter & Gamble's dividends to see if they are slowing down or speeding up their growth. This should give us at least a glimpse of how the company is doing.
Procter & Gamble has raised their dividend for now 56 years with the most recent increase that was announced about two weeks ago. This string of dividend increases is impressive, but what can investors expect in the future? To find out what Procter & Gamble might do, let's look at what they've done in the past. Take a look at Procter & Gamble's dividend growth over the last 10 years:
As you can see, it looks like Procter & Gamble has been slowing down their dividend growth. In particular, since 2008 the dividend has been increased by an even smaller amount. There is another factor at work here and that is Procter & Gamble is paying out more and more of the company's free cash flow in dividends. By comparison, in 2009 the company paid about 33.8% of their free cash flow in dividends, by 2011 this figure had jumped to 43.59%. Why did this happen?
In short, two factors have come into play that have changed Procter & Gamble's growth trajectory. First, Procter & Gamble's name brand competitors have gotten better. Unilever (NYSE: UL) in particular has been stepping up its game. In my prior post comparing the two companies, I found that though Procter & Gamble looked like the better bet overall, Unilever was growing its revenue faster. Specifically, Unilever is growing faster in the areas of personal care and home care. Seeing Unilever post sales growth of 8.4% versus Procter & Gamble's 2% sales growth, drives home the point even further that competition is tough. The second factor that has changed the way people shop in the last few years has been the improvement and increased acceptability of store brand alternatives. While many believed that store brands only performed well during economic downturns, this is turning out not to be the case. What happened is the Great Recession forced many to try store brands to save money. This occurred right around the time that companies improved both the packaging and quality of these brands. To be very specific, if a consumer realizes that he or she can buy a package of store brand diapers for $14.99 and get similar quality to the same quantity of diapers from a name brand for $19.99, the consumer will switch. Procter & Gamble built its reputation on the company's product quality and the amount of advertising that pushed these brands. As consumers had to tighten their purse strings, they tried store brands, and many will not switch back because they don't see the quality difference that they used to.
Procter & Gamble has a challenging road ahead of it. While the company is still growing its dividend, the percentage of growth going forward is likely to be lower than the historical average. I'm not suggesting that Procter & Gamble is not going to continue increasing the dividend, as the payout ratio is still well below 50%. What I am suggesting is, many consumers have now experienced store brand quality and found it to be good enough to not pay up for Procter & Gamble brands. With analysts expecting about 8% EPS growth going forward, if this does occur, the dividend growth will slow even further than it has. Procter & Gamble will only be able to fight this war with store brands by following their slogan of, “Innovating for Everyday Life.” Recent introductions of items like Tide Pods, Gain for dishwashing, and Gillette Guard in India, show the company is on the right track. These new introductions will need to continue to put the dividend growth back on the right track as well.
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