Dividend growth investing with the king of FMCG – Proctor and Gamble (PG)

Introducing the king for dividend growth investors in FMCG

PG is, in my mind, the king of investments for those interested in the FMCG space. This is a company that keeps on growing and continually rewards dividend growth investors and those seeking long-term cash flow and capital appreciation.

However, unlike some options in the sector, the wide acknowledgement of the sheer power of this company means that it trades at a premium as a core dividend growth investing opportunity.

Valuation

As I note – PG trades at a good premium, reflecting the regard with which it is held. Figure 1 shows the long-term premium with the regularly bestowed PE being over 20x. This is high, there is no way around it. The yield of 2.59% is not earth shattering but it does have a tradition of steadily increasing the dividends, with recent yearly increases of 3-5% not being great but steady and reasonable.

If we look at the current situation, with the price (black line) escalating far above the blue line (normal PE) on Figure 1, we can see that the current valuation of 24x is still over the normal PE even if it has decreased in recent months. While this yield and DGR is valuable for the dividend growth investing, in general, I see this as significantly over-valued, even though the company is an exceptional company with fantastic management. Analyst estimates are usually fairly reliable both one and two years out.

PG-dividend growth investing and dividend growth
Figure 1. PG-dividend growth investing and dividend growth. Long-term trends are positive with strong growth in earnings and dividends. Historical Graph – Copyright © 2011-2021, F.A.S.T. Graphs™ – All Rights Reserved

Future growth for dividend growth investing

As noted, the dividend yield is not fantastic and the dividend growth rate is not powerful, this is still of interest for dividend growth investing. Can we, therefore, assume that we may find the opportunity for capital appreciation? To assess the likelihood, we can look at the current PE and analyst estimates. Using Fastgraphs, we can see from Figure 2 that if we base our projections on the normal PE as the starting point and look at future earnings growth based on the analyst estimates, then we may see whether there is a positive upside.

PG-dividend growth investing and dividend growth
Figure 2. Future forecasts and an insight into PG-dividend growth using analyst forecasts and estimates. Historical Graph – Copyright © 2011-2021, F.A.S.T. Graphs™ – All Rights Reserved

From Figure 2, we can see several important elements. The current, high, PE means that it is harder and less likely to benefit from capital gains even though there is robust (albeit relatively low, but good for the FMCG sector) growth into 2024. The Fastgraph calculator suggests that if the prices remain at about this normal PE, we might expect approximately 7.55% annual return, with a reasonable amount of this from the dividend.

Verdict and thesis

So – will I be investing money into PG? Not today – it is overpriced and richly valued. It is deserving of this valuation but the high level means there is less margin of safety – an investment now has more downside risks if the market turns – and less opportunity for future capital growth. There is no doubt in my mind that this is an exceptional company that is worth investing in for those dividend growth investors. If we assume that the price is likely to decline in coming years, if market conditions worsen, then there may be a better opportunity for entry soon. I’ll be avoiding PG for a while until I can find it at a better value – perhaps lower than $100, putting it over 15x PE but with some greater safety, more upside, and a better starting dividend yield.

Introducing the king for dividend growth investors in FMCG PG is, in my mind, the king of investments for those interested in the FMCG space. This is a company that keeps on growing and continually rewards dividend growth investors and those seeking long-term cash flow and capital appreciation. However, unlike some options in the sector,…

Introducing the king for dividend growth investors in FMCG PG is, in my mind, the king of investments for those interested in the FMCG space. This is a company that keeps on growing and continually rewards dividend growth investors and those seeking long-term cash flow and capital appreciation. However, unlike some options in the sector,…

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