Stock valuation Procter & Gamble

The following stock valuation is about Procter & Gamble, one of the first stocks in my portfolio and probably a core holding in every dividend growth Portfolio. PG has increased its dividend for 60 years and is therefore one of the dividend Aristocrats. Nevertheless the growth of PG slowed down in the recent years and the payout ratio went up significantly in the last years. But let’s see if or when there will be a good entry point.

The Procter & Gamble Company (PG) is a consumer goods provider. It sells its products in more than 180 countries, and sells various items including beauty and grooming products and home-good products. Currently, the company has the following two main segments: Global Business Units and Beauty and Grooming and Household Care. P&G was founded in 1837 and is based in Cincinnati. Procter & Gamble has increased its dividend since 1957.

Valuation

Currently PG is priced  at 91.69 USD per share.

Valuation_PG

If I take the weighted average of the 4 ratios according to the 5  year average the price would be at 72.61 USD. That means the current price is 26.3% above its 5 year average. The 5 year high was at 93.46 USD about 2 yeas ago, so currently the stock just trades 1.9% below its 5-year high.

The fair market value ratio of the Household and Personal Product sector (consumer defensive), according to morningstar is currently at 1.11. If I divide the current price by it I will get a price of 82.60 USD.

Earnings per share growth

In 2011 the EPS were at 3.93 USD and EPS in 2016 were at 3.69 USD. This makes it an average decline per year of 1.25%. This does not really look very satisfying but when having a look at the future EPS (low expectations) of 3.75 USD in 2017 and 4.04 USD in 2018 the picture is not that bad anymore.

Dividend History and Future

PG has an impressive dividend history with increasing the dividend for 60 years in a row. In the last 5 years, the average growth per year is 6.19% based on a dividend of 1.97 USD in 2011 and a current full year one of 2.66 USD. The payout ratio with 72.1% is currently on a high level but based on the EPS expectation for 2017 and 2018 and a lower dividend growth I think the payout ratio will go back to a reasonable level.

An important point for my buying decision is as well the dividend yield on cost, which is currently at 2.9% based on the new yearly dividend of 2.67 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming now a much lower dividend growth of 3% per year the dividend in 2020 will be at 2.92 USD, which means a yield on costs of 3.18% before tax.

Conclusion

In general PG is at least for me currently overvalued, as for examples the P/E ratio is on an all time high and the company is still in a transition phase. It also seems that the big growth story of PG is over and growth will be much lower. But nevertheless I always have it on my watch list for a future investment. The company has an impressive balance sheet with a debt to equity ratio of 0.32 and it is also one of the few companies, which did not increased their debts significantly in the last 5 years. As a good entry point I see a price of around 76 USD to 80 USD.

What do you think about PG Do you already have it in your portfolio or would you buy it at its current price?

Disclosure: Long PG

I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.

7 Comments

  1. Very much agree with your assessment – been watching PG and CL but at these prices an earnings yield of just over 4% seems low with (potentially) rising inflation and rates. I can get a bond for almost the same but perhaps I don’t understand how these things work. Thanks for the write up.

    • Hi there,

      Bonds are of course also an option, in the future I will probably add some. The point with bonds is you just are not part of the increasing value of a company. Also through increasing dividends a 4% yield can be 7% yield on costs in around 7 years.

      Thanks for the comment

  2. Great write-up. I added to my position in early January and couldn’t be happier that I did so. It isn’t cheap, that is for sure, but it is one of those companies that rarely is cheap. There may be better discounts out there, but I love the quality that PG brings to the table!

    Bert

    • Hi Bert,

      I saw your purchase at your blog and the price at the time was much better: I think it was around 84 USD. Yes you are right those companies will never be cheap but I think currently the price is too high…

      Cheers

  3. I’ve never been a fan of conglomerates. Although the dividend is nice, conglomerates tend to be slow moving megacompanies. This means that in a bull market, the stock price of conglomerates tend to lag growth companies (e.g. tech).

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