Today I continue my series on the Dow 30 component stocks with consumer staples giant Procter & Gamble (PG). Their stock price is okay and the dividend growth continues to be phenomenal, but their balance sheet is horrible. To see how I came to these conclusions read on.
Procter & Gamble (PG)
Price: $63.31
Shares: 2.74 billion
Market capitalization: $173.17 billion
What does the company do: Since its founding in 1837, Procter & Gamble has become the world's largest consumer product manufacturer, with a lineup of famous brands. The brands are sold through three global business units, and include Tide laundry detergent, Charmin toilet paper, Pantene shampoo, Cover Girl cosmetics, and Iams pet food. Since 2001, the company has doubled the sales it derives from developing markets; acquired and integrated Wella and Gillette; and sold its pharmaceutical, coffee, and food businesses.
Morningstar’s take: During the past several years, Procter & Gamble has divested noncore businesses, repositioned its product portfolio toward more value offerings, significantly increased spending to reclaim and defend market share, and aggressively expanded in overseas markets. Unfortunately, the firm's stock hardly budged. Frustrated investors were asking whether P&G was doing enough to fix its problems, which included a bloated cost structure and sluggish top-line growth. In February, management responded with a massive $10 billion cost savings plan that will dramatically reduce headcount as the firm aims to return to 8% to 10% EPS growth and free up funds to reinvest in its business. This overhaul is significant, and while we're not entirely convinced that the firm can pull it off, we don't see much downside to the shares at current prices. That said, the stock gave up gains it enjoyed in the wake of its February restructuring announcement when during a a rocky third-quarter conference call management detailed pressures from slowing growth rates, competitive pricing, and negative foreign exchange. None of these pressures are new, so they were perceived as more excuses for a weak quarter, and that's not what investors expect of P&G management.
Bonds: $24.6 billion outstanding
Times interest earned: 13.9 times. PG earned $11.564 billion in 2011 and had interest expenses of $831 million in the same year. Their bonds are not an immediate threat to the dividend payments, but PG has a lot of big bonds due in 2014. If interest rates rise between not and 2014 (and I think they will), then PG will have a real challenge refinancing those bonds.
Preferred stock: PG has a small amount of preferred stock. They paid about $233 million in preferred dividends in 2011. The preferred stock is not a threat to the common dividends. You can see on the market capitalization graphic above that the preferred stock is a very small percentage of total capitalization.
DIVIDEND RECORD: Procter & Gamble has been an excellent dividend payer and grower over the last 25 years. They paid a $0.04 quarterly dividend in 1987. Today they pay a $0.56 quarterly dividend. That is 1,300% straight-line dividend growth over 25 years or 52% straight-line annual growth.
Dividend: $0.56 quarterly
Dividend yield: 3.56% ($2.24 annual dividend / $63.31 share price)
Dividend payout: 70% using 2011 EPS of $3.21 –OR- 57% using average adjusted earning power of $3.93
EARNING POWER: $3.93 at 2.74 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $2.66 | $7,257 M | 2,726 M | $2.65 |
2006 | $2.64 | $8,684 M | 3,286 M | $3.17 |
2007 | $3.04 | $10,179 M | 3,317 M | $3.71 |
2008 | $3.64 | $11,899 M | 3,317 M | $4.34 |
2009 | $4.26 | $13,244 M | 3,154 M | $4.83 |
2010 | $4.11 | $12,517 M | 3,099 M | $4.57 |
2011 | $3.93 | $11,564 M | 3,022 M | $4.22 |
Seven year average adjusted earnings per share is $3.93
Consider contrarian buying below $31.44 (8 times average adjusted EPS)
Consider value buying below $47.16 (12 times average adjusted EPS)
Procter & Gamble (PG) is currently trading at 16.1 times average adjusted EPS. This is stock is priced for investment.
Consider speculative selling above $78.60 (20 times average adjusted EPS)
BALANCE SHEET – Equity growth is stagnant, price to book value is bad at the current stock price, tangible book value is a negative number because of a huge percentage of intangible assets, their liquidity is horrible also. Weak balance sheet.
Book value per share: $23.81 ($65.265 B in equity / 2.74 B shares)
Price to book value ratio: 2.65 (under 1.0 is good) ($63.31 share price / $23.81 BV) PG investors are paying $2.65 per $1.00 of book value. That is not a bargain price.
Tangible book value per share: -$7.66 (equity - $54.833 B goodwill - $31.429 B intangibles)
Price to tangible book value: N/A because negative number
Current ratio: 0.86 latest quarter (over 2.0 is good) ($23.108 B current assets / $26.904 B current liabilities)
Quick ratio: 0.15 latest quarter (over 1.0 is good) ($3.991 B cash / $26.904 B current liabilities)
Debt to equity ratio: 0.33 (lower is better)
Percentage of total assets in plant, property, and equipment: 15.14% (the higher the better) Other assets as a percentage of total assets: 64.09% intangibles, 17.17% current assets, and other long term assets 3.6%
Working capital trend: Horrible. This company relies on just in time financing and will be at risk during a financial crisis like the one in 2008 and the next one brewing right now. They have to finance about $5 billion dollars each year just to pay their current liabilities.
CONCLUSION – Procter & Gamble bottomed in March 2009 at $45.59. That is a little under 12 times average adjusted earnings. I would wait to buy this stock below 12 times average adjusted earnings of $47.16. The stock currently yields 3.56%, which is a lot more than the S&P 500 average of around 2.2%. They continue their awesome dividend growth pattern, but a worldwide recession can harm even the consumer staple stocks. Poorly run finances can threaten the dividend in the future. This company has a horrible balance sheet. I relies on just in time financing like banks to operate. A worldwide repeat of the financial crisis will hurt PG badly. I would stay away until they fix their weak balance sheet.
DISCLOSURE – I don’t own Procter & Gamble (PG).
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