Large-cap stocks such as The Procter & Gamble Company (NYSE: PG) might seem a boring investment, but sometimes that’s what your portfolio needs. The equity markets continue to trade near all-time highs despite rising COVID-19 cases in several parts of the world and the threat of another economic lockdown, especially if things spiral out of control.
In case markets turn turbulent overvalued growth stocks will grossly underperform the market. Alternatively, blue-chip stocks such as Procter & Gamble will be relatively immune to economic shocks given its low beta score of 0.42.
A Dividend Aristocrat
Procter & Gamble has a wide portfolio of consumer products across categories making it one of the largest companies in the world. Valued at a market cap of $343 billion and an enterprise value of $365 billion. P&G reported close to $71 billion in sales and over $15.7 billion in operating income last year. PG stock is part of the S&P 500 as well as the Dow Jones Industrial Average, two of the most popular indexes in the world.
P&G’s resilient business has allowed the company to increase its dividends for 64 consecutive years. PG stock currently provides investors a quarterly dividend of $0.87 per share indicating a forward yield of 2.5% which is significantly higher than the 10-year Treasury yield of 1.6%.
The company’s products are sold to a staggering five billion consumers worldwide. In the past two decades, P&G has expanded its product line and has diversified weaker brands as well. Due to massive consumer reach, P&G’s organic revenue remains stable while it continues to focus on cost optimization strategies and share repurchases to boost its bottom line.
For example, Procter & Gamble has increased its adjusted earnings per share from $3.67 in 2019 to $5.12 in 2021. Now, Wall Street has forecast earnings to grow at an annual rate of 9% in the next five years.
PG stock has room to increase dividends
In the last four quarters, P&G has spent around 50% of its free cash flow on dividend payouts. This low payout ratio suggests investors can expect dividend hikes from this S&P 500 giant going ahead as well. In the last three quarters, its adjusted free cash flow increased by 19% year over year to $12.4 billion.
At the end of fiscal 2020 (ended in June), the company had forecast it would spend around 90% of adjusted free cash flow on share repurchase programs and dividends. It has also managed to decrease its outstanding share count by 11% in the last 10 years which has supported EPS growth for P&G.
After you account for dividend reinvestments, PG stock has returned 195% to investors in the past decade. Comparatively, the S&P 500 has risen by almost 300% since July 2021 while the Dow Jones 30 is up 244% in this period.
However, consumer product companies such as P&G are considered defensive plays, and in case fears of a resurgence in COVID-19 cases come true, these stocks could experience an uptick in prices driven by a boost in demand, as we saw in 2020. In fact, PG stock rose 23% between March and October 2021. Comparatively, the S&P 500 and Dow Jones 30 gained 12% and 5.6% in this six-month period.
As the pandemic kept people at home, demand for consumer goods began to soar, driving the rally in P&G and its peers.
The verdict
Procter & Gamble leads the consumer goods market and its brand positioning has allowed the company to generate predictable cash flows and consistent profits. When you combine its leadership position with its strong balance sheet, we can why PG stock remains ideal for equity investors.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
