Dividend Growth portfolio holding Procter & Gamble (PG) is breaking out to new highs today, and we have no reason to believe that its equity price won’t see continued support thanks to its robust dividend. The firm’s yield of 3% appears rock-solid, and its plans to shed Duracell should help bolster the balance sheet, an integral part of continued dividend health. Strengthening and streamlining its brand portfolio means cash proceeds are right around the corner as it exits certain businesses.
During Procter & Gamble’s first quarter of fiscal year 2015, results announced Friday, organic revenue advanced 2% in the period thanks primarily to price and mix, leading to core earnings per share jumping 9% on a currency-neutral basis. Management acknowledged the difficult operating environment, but the results were solid, in our view, especially in light of higher commodity costs and incremental restructuring charges. Strength was led primarily by its Health Care segment, where organic sales advanced 6% thanks to innovation-fueled expansion in Oral Care and Personal Health Care.
Procter & Gamble generated operating cash flow of $3.6 billion and free cash flow of $2.8 billion during the quarter, levels that are robust by any measure. The firm recently divested its pet care business, and we think the exit of the battery business will help sharpen the focus on productivity and efficiency initiatives. We view the quarter and its plans to sell Duracell as positive events for the health and safety of the dividend. According to the report, P&G shareholders will have the “option of exchanging some, none, or all of their P&G shares for shares in the newly-formed Duracell company.” The transaction is expected to be completed in the second half of calendar year 2015.
Looking ahead, P&G reiterated its fiscal 2015 view that investors should expect organic sales growth in the low-to-mid single digit range and core earnings per share in the range of mid-single-digits. P&G boasts an impressive 1.7 Dividend Cushion ratio, and we expect the firm to continue to add to its 55+ years of consecutive dividend increases going forward. The firm remains a key holding in the Dividend Growth portfolio.