Procter & Gamble Co (PG) Dividend Stock Analysis 2016

The annual dividend payment has increased by 8.70% per year over the past decade, which is higher than the growth in EPS. Given the increase in the dividend payout ratio, and lack of earnings growth over the past decade, I expect anemic dividend growth going forward.

Since 1970 Procter & Gamble Co (NYSE:PG) has actually managed to double dividends every five years on average. It is quite possible that Procter & Gamble’s dividend streak comes to an end, if earnings growth cannot be restarted.

In the past decade, the dividend payout ratio increased from 42.10% in 2007 to 76.20% in 2016. A lower payout is always a plus, since it leaves room for consistent dividend growth, minimizing the impact of short-term fluctuations in earnings.

The return on equity has remained stable between 13% to 18%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is overvalued at 21.40-times forward earnings and yields 3.20%. Given the lack of earnings growth over the past decade, the high payout ratio, and the high valuation, I am not interested in the company. If I were starting out today, I would not be initiating a position in the stock.

I am holding on to my shares for the time being because it is possible that the company may turn around operations over the next decade, emerging markets turn hot again, and the dollar weakens ( which would make international sales more valuable).

My investment record has shown me that I make a mistake in 80% – 90% of the situations where I have sold an investments for any reason, and bought something else with the proceeds. The original investment turns around its operations and rewards its patient investors, whereas the new investment starts experiencing troubles. In addition to that, if I were to sell Procter & Gamble, I would also have to pay a significant amount to the tax man on the realization of long-term capital gains.

That being said, I am allocating my P&G dividends elsewhere (3). I am trying to become as passive as an investor as possible, and let my collection of businesses do their job, without micromanaging them. If P&G cuts dividends however, I would be out one second after the announcement.

Full Disclosure: Long PG, UL, KMB, CL

Additional Links:

(1) http://www.dividendgrowthinvestor.com/2016/04/procter-gamble-raises-dividends-for.html

(2) http://www.dividendgrowthinvestor.com/2015/06/the-most-important-metric-for-dividend.html

(3) http://www.dividendgrowthinvestor.com/2009/07/reinvest-dividends-selectively.html