Permanency is tough to come by. Most everything is fleeting. Of the 30 Dow stocks in 1985, only 11 remain today. Go back to 1960, only six remain.
Procter & Gamble (NYSE: PG) is one of the six from 1960. In fact, P&G has been a Dow Industrial stock since 1932. Its history extends nearly 100 years before that. P&G has been a public company since 1890.
For the 125 years P&G has been publicly traded, it has paid a dividend each of those years – the mark of a true forever stock. For the past 59 years, that dividend has been increased annually. Annual dividend growth is a wonderful wealth compounding factor.
If we go back to 1990, P&G paid $0.225 a share annually in dividends. Today, it pays $2.64 annually. In 1990, you could have picked up a share of P&G stock for around $10. Today, you’ll pay around $76. Yes, you have share-price appreciation, but you also have a 26% annual return in dividends alone on your original purchase.
P&G is without question a dividend aristocrat. You could even argue that it is the aristocrat of the aristocrats. That said, it has lost some of its luster. Since 2010, P&G shares are up 26%, but its benchmark, the Dow 30, is up 63%. Much of the lag is attributed to 2015. This year alone, P&G shares are down 16%.
Everyone knows that P&G owns a stable of powerful consumer brands – Tide, Gillette, Crest, Pampers, Bounty, Charmin. Twenty-five of its brands generate $1 billion or more in annual revenue. The problem is that it has also accumulated lesser brands over the years. These brands haven’t pulled their weight. Growth has ground to a halt.
Revenue for the fiscal fourth-quarter 2015 (ended in June) posted lower than expected at $17.8 billion. P&G experienced a decrease in volume in its beauty, grooming and health care segments. Overall, organic sales gained 2%, but most of this gain was the result of price increases.
But things are changing. P&G has shed nearly 100 brands and promises to shift into growth mode in areas such as beauty and grooming and diapers once full divestiture is achieved. The combination of a more focused portfolio and a lower cost structure clears the way for strong profit gains in the future.
Nevertheless, investors remain on their heels because of the unclear outlook on top-line growth. This doesn’t mean EPS growth is unclear. P&G’s fourth quarter showed productivity improvements and a 22.5% increase in earnings, excluding restructuring costs and the impact of a stronger dollar.
Though P&G has had difficulty igniting revenue growth, the revenue it generates produces a firestorm of cash.
Over the past 12 months, P&G generated $11.6 billion in adjusted free cash flow. This cash ensured that it was able to raise its dividend a 59th consecutive year. In total, the company returned $11.9 billion in cash to shareholders – $7.3 billion in dividends and $4.6 billion in share repurchases. Over the past five years, P&G has returned $60 billion – $12 billion on average annually – to shareholders.
The future is what matters, though, and management appears to have more faith in P&G’s future than most. At a recent analysts meeting, management announced it intends to return up to $70 billion – $17.5 billion annually on average – to shareholders over the next four years. In other words, expect more dividends, more share buybacks and more EPS growth in the future.
In the present, investors have the opportunity to buy an improved future P&G at a discount today. P&G shares typically yield around 2.5% to 3%; today they yield 3.5%. More cash today followed by more cash tomorrow isn’t such a bad investing strategy.