Procter & Gamble (PG) reported strong fiscal fourth-quarter results Friday. The April-June quarter revealed organic sales expansion of 2% thanks to strong pricing expansion and core earnings-per-share growth of 20%, to $0.95. Excluding the negative impact of foreign exchange, currency-neutral core earnings per share increased 25%. We continue to like the pricing power of Procter & Gamble’s brands, and the pace of earnings growth was fantastic during the last quarter of its fiscal year. Management continues to deliver on its top and bottom-line commitments.
P&G’s brands include Tide, Ariel, Gillette, Venus, Bounty, Charmin, Pantene, Olay, Pampers, Crest, Oral-B, Duracell, and Vicks. These brands aren’t going away anytime soon, in our view. Though management indicated that it will shed some lower-margin brands, the company’s innovation pipeline remains robust. The markets the firm serves from ‘Beauty’ to ‘Baby, Feminine, Family’ to ‘Health & Grooming’ are massive and growing. For the fiscal year, the company’s ‘Fabric Care and Home Care’ and ‘Baby, Feminine and Family Care’ segments were the strongest, growing 4% on an organic basis. P&G’s ‘Grooming’ segment led pricing expansion for the fiscal year.
Operating cash flow totaled ~$14 billion for the year, with free cash flow coming in at a robust $10.1 billion – both measures were slightly lower than the year-ago marks, but they were still very robust. The company repurchased ~$6 billion of shares and returned ~$6.9 billion of cash to shareholders as dividends during the fiscal year. In April, P&G raised its dividend, marking the 58th consecutive year of dividend increases. The firm’s Dividend Cushion ratio of 1.4 indicates that investors should expect continued dividend expansion in coming years (the higher the ratio above 1, the better).
| Dividend Cushion Ratios in the Household Products Industry | ||||
| Company | Symbol | Dividend Yield (%) | Dividend Cushion™ (1) | Net Balance Sheet Cash ($ mil) (2) |
| Church & Dwight | CHD | 1.8% | 2.5 | -605.8 |
| Colgate-Palmolive | CL | 2.1% | 1.9 | -4,900.0 |
| Clorox | CLX | 3.2% | 0.7 | -1,841.0 |
| Kimberly-Clark | KMB | 3.0% | 1.3 | -5,186.0 |
| Johnson & Johnson | JNJ | 2.7% | 2.3 | 12,100.0 |
| Procter & Gamble | PG | 3.2% | 1.4 | -24,731.0 |
| (1) The Dividend Cushion sums future free cash flows (cash flow from operations less capital expenditures) and net balance sheet cash (total cash less total debt) and divides the sum by the firm’s expected cash dividends over the next five years. It is a comprehensive measure of dividend health. | ||||
| (2) Valuentum believes that net cash on the balance sheet is an important contributor to dividend health and dividend growth. Cash dividends can either be paid with cash flow or with cash on the balance sheet. | ||||
Note: Johnson and Johnson (JNJ) is also a Dividend Growth portfolio holding.
Looking ahead to fiscal year 2015, P&G expects organic sales growth in the low-to-mid single digit range and core earnings per share to expand in the range of mid-single-digits. Though foreign exchange will cause reported results to differ from core performance, we generally model in core performance with the universal assumption that foreign currency movements are neutral to the intrinsic value calculation. This is standard practice.
Valuentum’s Take
Procter & Gamble boasts 120+ consecutive years of dividend payments and 55+ consecutive years of dividend increases. Its payout is rock-solid, and we think shares belong in the Dividend Growth portfolio. The firm’s valuation may not be as attractive as it once was, but its income stream is something we can count on. Shares of Procter & Gamble yield ~3.2% at present.
Household Products: CHD, CL, CLX, ENR, HELE, KMB, JNJ, LBY, PG