Procter & Gamble: A Dividend Giant Facing Slowing Growth

🪥Business Overview

Founded in 1837, Procter & Gamble (P&G) is a global leader in household and personal care products. With a portfolio of trusted brands spanning personal care, cleaning, and healthcare, P&G is known for its brand strength, pricing power, and operational efficiency. It has increased its dividend for 67 consecutive years, making it one of the most reliable dividend growth stocks in the market. This consistency reflects the strength of its cash flows and its shareholder-friendly capital allocation. Looking ahead, its focus on innovation, cost discipline, and expansion in emerging markets supports a stable, long-term outlook in line with inflation or the risk-free rate.

💵Revenue Exposure & Diversification

The revenues are geographically diversified over the following geographic segments:

• United States: 48.21%
  • 1-Year Revenue Growth = 4.65%
• International: 51.79%
  • 1-Year Revenue Growth = 0.46%

Its also diversified across several business segments:

• Fabric & Home Care: 35.10%
  • 1-Year Revenue Growth = 3.96%
• Baby, Feminine & Family Care: 24.13%
  • 1-Year Revenue Growth = 0.30%
• Beauty: 18.11%
  • 1-Year Revenue Growth = 1.41%
• Healthcare: 14.03%
  • 1-Year Revenue Growth = 5.05%
• Grooming: 7.92%
  • 1-Year Revenue Growth = 3.66%
• Corporate: 0.71%
  • 1-Year Revenue Growth = -21.44%

🎯Key Insights & Assumptions

• Revenue Growth (CAGR): 5-Year Avg: 4.32% | Last Year: 2.48%
  • Given the company maturity and stage of its lifecycle, growth is expected to remain modest at the rate of inflation and the risk-free rate, so it will float around 2-4% over the next years.
• Free Cash Flow Growth (CAGR): 5-Year Avg: 3.62% | Last Year: 19.80%
  • Despite a strong last year, long-term FCF growth is expected to normalize, as with the revenues, around the risk free rate of 2-4%.
• Operating Margin: 5-Year Avg: 23.26% | Last Year: 22.18%
  • Margins may taper slightly to 20–22% as competitive pressure increases, but will likely remain above the industry average of 14–16%.
• Return on Invested Capital (ROIC): 5-Year Avg: 20.20% | Last Year: 19.99%
  • Expected to remain around 20%, supported by P&G’s mature and efficient operations.
• Dividend Payout Ratio: 5-Year Avg: 61.33% | Last Year: 63.61%
  • Payout is well covered by FCF. Expected to rise modestly toward 65–70% if dividends outpace FCF growth.
• Dividend Growth (CAGR): 5-Year Avg: 6.03% | Last Year: 4.08%
  • Anticipated to stabilize around 2–4%, in line with the company's expected FCF and revenue growth.

📈Business Valuation

To assess P&G’s intrinsic value, four valuation methods are used, with different weightings to reflect relevance and reliability:

• Discounted Cash Flow (DCF) - Intrinsic value is estimated by projecting Procter & Gamble's free cash flows over the next 10 years and discounting them to present value.
• Dividend Discount Model (DDM) - Intrinsic value is estimated by projecting the cash flows from its dividends over the next 10 years and discounting them to present value. We'll be transitioning the dividend growth from its historic average into a stable growth rate.
• Historical Dividend Yield - estimation of fair value using a relation to the historical dividend yield that the company has traded over the last 5 years.
• Historical P/E Ratio - estimation of fair value using a comparison of the current PE multiple to its historical value over the last 5 years.

Given that both Historical methods assume a mean reversion, that may not occur, DCF and DDM valuation methods will be more heavily weighted.

Assuming a continuous emphasis on the payment of dividends and the slowing of the company revenues/growth over the following years, it justifies to put more weight onto the historical dividend mean reversion and less into the historical PE reversion, given that a transition into higher PE ratios is not expected given the slowing of growth.

Discounted Cash Flow (Weight: 35%)

📌 Key Assumptions

• Revenue Growth (CAGR) is estimated to be around 1% in Year 1, 3% in Years 2-5 , tapering to 4.42% (risk-free rate) in perpetuity.
• Operating Margin lowering gradually to ~20% , driven by the loss of its competitive advantage.
• Cost Of Capital at ~8.42% considering its global revenue exposure and Moody's credit rating of Aa3.
• ROIC terminal value will be set to ~20% (around its ~20.20% 5-Year Avg), given the maturity of its efficiency systems.

💰 Fair Value Estimate

Based on the DCF model, Procter & Gamble's estimated fair value is $105.00, suggesting that currently the stock may be overvalued.

Dividend Discount Model (Weight: 35%)

📌 Key Assumptions

• Dividend Growth begins at 4.7% (10-year average) and then tapering to a stable rate equal to the risk free rate (10-YR US bond yield) of 4.42%;
• Discount Rate or required return will be equal to 8.42% that it's the cost of capital (WACC) calculated during the DCF valuation.

💰 Fair Value Estimate

Based on the DDM model, Procter & Gamble's estimated fair value is $111.93, suggesting that currently the stock may be overvalued.

Historical Dividend Yield (Weight: 20%)

• Current Dividend Yield: ~2.730%
• 10-Year Median Dividend Yield: ~2.565%

💰 Fair Value Estimate

This suggests that the stock is trading below its intrinsic valuation, indicating a potential upside of 6.04% if it reverts to its historical median.

Using this method, its fair value should be $145.73.

Historical P/E Ratio (Weight: 10%)

• Current P/E ratio: 24.0x
• 5-Year Median P/E ratio: 25.2x

💰 Fair Value Estimate

This suggests that the stock is trading below its intrinsic valuation, indicating a potential upside of 5.00% if it reverts to its historical median.

Using this method, its fair value should be $147.35.

Summary

Blending all four valuation methods by their assigned weights, it is estimated that the fair value of Procter & Gamble is $119.81.

This suggests that Procter & Gamble may currently be trading above its fair value, with limited upside unless margin expansion or revenue surprises occur. The company remains a high-quality, stable dividend payer—but at a premium valuation.