Is Procter and Gamble a Buy?

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Consumer staples giant Procter and Gamble (NYSE: PG) is the gold-standard among rank-and-file dividend paying stocks. The company epitomizes slow and steady investing, having for many decades in a row provided investors steady profit growth and reliable dividend payments.

At the same time, over the last couple years, P&G has experienced a sharp rally that would normally be reserved for high-flying small-cap stocks. Income investors are understandably attracted to P&G stock, but is there still a case to be made from a value perspective?

A world-class business

P&G directs investors’ collective attention to its 50 ‘Leadership Brands,’ the 50 products that comprise 90% of the company’s revenues and more than 90% of its profits. 25 of them each generate at least $1 billion in annual sales.

Its flagship brands can be found in virtually every aisle in the local grocery store. These include Gillette razors, Pampers diapers, Bounty paper towels, Tide laundry detergent, Crest toothpaste, and Head and Shoulders shampoo.

Not surprisingly, the consumer staples sector is filled with highly profitable companies with long histories of success.

Clorox (NYSE: CLX) is also a market leader among consumer staples stocks. The company sells its products in more than 100 countries, and has many household brands including its namesake bleach, Kingsford charcoal, Pine-Sol cleaner, and Glad trash bags. Nearly 90% of Clorox’s brands hold the No. 1 or No. 2 market-share positions in their categories.

Going forward, Clorox provides investors with what it calls its Centennial Strategy, designed to underscore its long-term strategic initiatives. One of which is long-term revenue growth between 3% and 5% per year, and profit growth to be slightly above those levels.

Close industry peer Colgate-Palmolive (NYSE: CL) has more streamlined operations as compared to its two peers. The company is tightly focused on Oral Care, Personal Care, Home Care, and Pet Nutrition. Colgate sells its products in over 200 countries around the world, under such internationally recognized brand names as Colgate, Palmolive, Mennen, Speed Stick, Softsoap, and Irish Spring.

Compelling shareholder returns

A major reason for investing in the sector is the reliable dividend checks the sector is known for. No matter the prevailing economic climate, P&G’s rock-solid brands are found in millions of shopping carts every day. That means that investors can count on those quarterly dividend checks to keep rolling in for many years to come.

To illustrate, in fiscal 2012 P&G returned $10 billion to shareholders through dividends and buybacks. Very recently, the company increased its dividend by 7%. This year marks the 123rd in a row of consecutive dividend payments, since the company’s incorporation in 1890. Furthermore, P&G has increased its dividend for 57 years in a row.

P&G’s competitors aren’t far behind in that regard. Clorox recently gave its investors a healthy 11% pay raise. Clorox has an impressive dividend track record of its own: total annual dividends paid to Clorox shareholders have increased each year since 1977.

Colgate-Palmolive recently bumped up its shareholder payout by 10%. Colgate-Palmolive has paid uninterrupted dividends on its common stock since 1895 and increased payments to common shareholders every year for 51 years.

Is the stock a buy?

P&G is a company I admire for many reasons, including its amazing history and wonderfully stable business. The company has a stable of well-known brands that can be found in nearly every home in America. Moreover, the company’s international expansion is a likely source of strong growth going forward.

That being said, as much as I would love to own a tiny fraction of what is a fantastic business, I can’t bring myself to buy the stock at its current levels. P&G trades for a trailing price-to-earnings multiple of 17, about on par with the broader market, and the stock currently yields 3%.

P&G investors will continue to receive decent earnings growth and dividend growth in the high single digits to low double digits for a long time. The company and its investors should do reasonably well for many years, but at the same time, it’s hard to make the case that the company is a screaming buy. I consider P&G, as well as most of the consumer staples giants, to be fairly valued at their current levels, and I’m waiting for a significant pullback before jumping in.

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Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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