There aren’t many legacy stocks out there. Stocks that build wealth year after year, decade after decade.
The Procter & Gamble Company (NYSE: PG) is arguably the last of the legacy stocks.
P&G owns the best portfolio of consumer-products brands in the world. It boasts a global presence few companies can match. It has a long history. It has been around for 124 years… and has paid a dividend every one of those years. What’s more, the dividend grows 8% to 10% year after year – and has for 58 consecutive years.
Where do I begin? Tide, Crest, Charmin, Pampers, Gillette, Bounty, Cascade, Old Spice, Pampers, Oil of Olay. Consumers respond to P&G brands like Pavlov’s dog responded to the bell. But instead of salivating, they buy.
P&G: The World’s Best Dividend Stock
Procter & Gamble has so effectively conditioned consumers that of its 50 brands, 25 generate $1 billion or more in annual sales. In total, these brands generate over $80 billion in annual sales.
Despite its considerable size and global penetration, P&G keeps the needle moving through new iterations of leading brands like Tide and Crest; new products, like Febreze; forays into emerging markets and Asia; and symbiotic acquisitions (the 2005 Gillette purchase).
Annual revenue has increased 64% since 2004. Annual EPS has increased 62%. Revenue and earnings growth have increased at roughly at the same pace.
Not surprisingly, China and emerging markets offer opportunity. P&G estimates that it generates annual revenue of roughly five times more per person in Mexico than it does in the U.S.; 25 times more per person in China; and 95 times more per person in Indonesia. Increasing per-capita spending in these growing markets to the level of Mexico alone would add billions to annual sales.
Growth is nice, but efficiency also matters.
On the cost side of the equation, P&G launched a $10 billion cost-savings program two years ago. Management targeted a run rate of $1.2 billion in cost-of-goods productivity savings per year. The company forecasts more than $1.6 billion in savings next year. Management forecasts at least two to three more years of this level of savings.
Cost cuts will surely help margins, as will jettisoning unproductive businesses.
To make P&G more nimble, management is keen to shed weight. P&G plans to divest nearly half of its 160 brands. After the divestiture, P&G will retain 70 to 80 brands, which will include Tide, Gillette, Charmin, Crest, and other market leaders.
The newer, slimmer P&G will likely see operating margins expand for the first time in years. Expanding margins translates to expanding earnings growth and expanding dividend growth, which should lead to a higher share price.
Returning more money to shareholders will also drive value.
I expect P&G to continue to reduce its share count, thus concentrating financial gains on fewer shares. Over the past year, P&G has spent $5.5 billion on share repurchases, lowering average shares outstanding roughly 1%. I expect P&G to spend at least as much on share buybacks next year.
P&G might not deliver another 124 years of dividends, and nearly as many years of annual compounded wealth. But I wouldn’t bet against it.
Dividends for Every Month of the Year
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