We couldn’t be happier with the fundamental performance of two of the larger holdings in the Dividend Growth portfolio. Procter & Gamble (PG) and Microsoft (MSFT) both reported solid fiscal second-quarter earnings (calendar fourth-quarter earnings) this week.
Procter & Gamble boasts some of the most-recognized branded consumer packaged goods and holds a significant share position in the markets in which it operates. The company boasts 120+ consecutive years of dividend payments and 55+ consecutive years of dividend increases. Procter & Gamble’s dividend payout is rock-solid, and we were reminded as much when it released fiscal second quarter results Friday. On an adjusted basis, organic growth advanced 3%, leading to a solid currency-neutral, core earnings-per-share advance of 8% during the period, the latter above its 5-7% core earnings-per-share target for the year. Procter & Gamble experienced organic volume expansion across all of its business lines—Beauty; Grooming; Health Care; Fabric Care and Home Care; Baby, and Feminine and Family Care. During the quarter, the consumer packaged goods giant generated $3.3 billion in operating cash flow and $2.36 billion in free cash flow (or about 10.6% of sales). The company expects the strong pace of earnings expansion to continue on the back of “solid top-line growth, moderating headwinds from foreign exchange, and productivity savings that build throughout the year.” We won’t be parting with the shares in the Dividend Growth portfolio anytime soon.
Microsoft’s fiscal second-quarter earnings, released Thursday, were even better. Revenue jumped 14.3% on a reported basis, while operating income and net income advanced modestly. The company posted earnings per share of $0.78 on a diluted basis, roughly $0.10 per share better than the consensus estimate, a huge beat for a company of Microsoft’s size. The firm’s ‘Devices and Consumer’ segment revenue advanced 13%, while its ‘Commercial’ revenue jumped 10%. These types of growth rates at Microsoft are worth noting, especially when it doesn’t come at the expense of earnings expansion (the bottom-line still increased on a year-over-year basis). Microsoft is clearly taking share from competitors and has started to act more like a nimble organization, especially with Surface revenue more than doubling, Xbox console sales advancing significantly, and Bing search share and search advertising revenue growing nicely. SQL Server revenue, System Center revenue, and commercial cloud services revenue each grew at a double-digit pace. Capital spending was elevated during the period, but the technology giant continues to generate robust cash flow, and the financial flexibility that its balance sheet provides paves the way for substantial dividend growth. A focus on operating expenses (fiscal year 2014 guidance now $31.2-$31.5 billion, was $31.3-$31.9 billion) and lower-than-expected capital spending (it cut its fiscal year 2014 capex budget to $6 billion) will also help. Microsoft continues to be a solid performer in the Dividend Growth portfolio.
Valuentum’s Take
At the high end of the fair value range, we think Procter & Gamble is worth $88 per share (at the time of this writing). Microsoft’s valuation opportunity, however, is much more compelling, even though we like both as powerful dividend growth gems. If broader markets cooperate, we wouldn’t be surprised to see Microsoft’s stock converge to our $46 per share intrinsic value estimate. We won’t be parting with Procter & Gamble or Microsoft anytime soon in portfolio of the Dividend Growth Newsletter.