When it comes to dividend increase streaks, few companies out there can match The Procter & Gamble Company (NYSE: PG). Its 65-year streak of annual increases is a remarkable accomplishment that put this stock on the radar of many yield-oriented investors. In this article, we will examine the most important dividend factors, including growth, volatility, and coverage.
With a dividend history of over a century and growth for over 50 years, the company belongs to an elite group of dividend kings.
This was accomplished by the continuous pursuit of excellence, innovation, and crafty marketing. The ultimate result is a strong brand with superior profit margins versus the industry.
A 2.4% yield is not the highest, but investors can lean on the long payment history. The company also bought back stock during the year, equivalent to approximately 2.7% of the company's market capitalization at the time. When buying stocks for their dividends, you should always run through the checks below to see if the dividend looks sustainable.
Companies (usually) pay dividends out of their earnings. Consequentially, we should always investigate whether a company can afford its dividend, measured as a percentage of its net income after tax.
In the last year, Procter & Gamble paid out 57% of its profit as dividends. This is a healthy payout ratio, and while it does limit the reinvestments in the business, there is also some room to lift the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Procter & Gamble paid out 53% of its cash flow as dividends last year, which is within a reasonable range for the average corporation.
It's positive to see that both profits and cash flow cover Procter & Gamble's dividend since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Consider checking our latest analysis on Procter & Gamble's financial position.
Procter & Gamble has been paying dividends for over a century, but we only examine the past 10 years of payments for this analysis.
During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was US$1.9 in 2011, compared to US$3.5 last year. Dividends per share have grown at approximately 6.1% per year over this time.
Companies like this, growing their dividend at a decent rate, can be valuable over the long term, if the growth rate can be maintained.
Dividend Growth Potential
While dividend payments have been relatively reliable, earnings per share (EPS) is as equally as important as it is essential in maintaining the dividend's purchasing power over the long term.
Earnings have grown at around 9.7% a year for the past five years. The rate at which earnings have grown is quite decent, and by paying out more than half of its earnings as dividends, the company is striking a reasonable balance between reinvestment and returns to shareholders.
Overall, the company passes our 3-step dividend checklist. Its dividend is affordable, there is a stellar record of consistent payments, and the dividend can grow, even in the face of potential turmoil.
All things said, Procter & Gamble represents the ultimate dividend growth stock. However, as the stock returned to the all-time highs, buying at such a valuation can be hard to justify. Especially after our intrinsic value analysis pointed that the stock might be overvalued at the moment.
Nonetheless, given the quality and the track record of the company, it deserves an honorable spot on the watchlist for any yield-oriented investor.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 2 warning signs for Procter & Gamble that investors should know about before committing capital to this stock.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.