Dividend King Offers 24.1% Upside
Some stocks are just plain old boring. In bullish markets, you can gloss past them for better opportunities. But in bear markets, they can save your portfolio. One such company is Procter & Gamble.
Less than a year ago it was trading at over $160 per share. Since its 52-week high was reached, it’s down by over 21%, relatively outperforming the major market indices.
As the bear market rolls on, Procter & Gamble offers an ever more compelling value proposition.
Why Buy Procter & Gamble
There’s an old rule of thumb in business that the most dangerous number is 1. If you have one employee or one product or one service, the business risk is enormous should anything happen to that one key person or offering.
What makes Procter & Gamble so compelling is its diverse product mix. Everyday items you know well are sold by P&G. For example, these are all brands under the P&G corporate umbrella:
- Always: Feminine Care Pads
- Braun: Personal Grooming
- Head & Shoulders
- Gillette Razors
The company has five business segments and three of them reported sales growth in the past quarter. Better still, revenue growth was not interrupted by COVID.
Top line growth over the past few fiscal years has been very stable:
- 2018: 2.7%
- 2019: 1.3%
- 2020: 4.8%
- 2021: 7.3%
- 2022: 5.3%
These numbers won’t stand out as the type Cathie Wood at ARK Invest would jump at but a P&G investor is looking for stability and predictability over high growth and pizazz. With top line revenues of $80 billion, this is a juggernaut that continues to steamroll irrespective of market booms and busts.
Where P&G Shines
In a recession, P&G has a distinct advantage over many other companies you might consider investing in because it sells everyday “must-have” items like toothpaste, razors, and detergents.
One of the biggest predictors of business success is customer retention and that’s a metric where P&G shines brightly. Customers simply cannot escape the P&G brand ecosystem. Whether it’s the firm’s dominant presence in Amazon’s top 10 list or the shelves of Target, Procter & Gamble has distribution channels that are the envy of smaller competitors because they create a nearly indestructible moat.
And yet the company is trading today well below fair value. We place intrinsic value per share at $160.94 based on a discounted cash flow forecast analysis. That would suggest upside of over 24% based on today’s levels.
It’s rare to find a company with such enormous revenues trading at such a discount to fair value, especially when paying a generous dividend of 2.84%. Indeed, it has paid higher dividends uninterrupted for over 50 years and has a payout ratio of just under 60%.
Furthermore, we examined the company’s price change after its last 10 earnings announcements and the largest swing was about 3% up or down. That’s a tolerable level of volatility for most investors, suggesting the stock can be held with a high level of peace of mind.
With that said over the past 3 months, analysts have revised their targets overwhelmingly down. 13 of 14 analysts have lowered expectations. That’s not a surprise however given that P&G is susceptible to higher input costs as inflation rises. And a higher interest rate environment negatively affects the discount rate that sets valuation. Nonetheless, the core business model is sturdy and the company has a solid history of grinding higher over the long-term, as evident by its double over the past decade.
The bottom line is come rain or shine Procter & Gamble is a stock that deserves a spot in most any portfolio, but especially during periods of economic weakness.