Polliesdividend

A low dividend increase by PG, why?

Almost one month ago Procter & Gamble (PG) declared a dividend increase of 3%. This was way lower than I had anticipated (and hoped) for. It was the smallest increase in the last decade.

In the last years the dividend increases of PG were much higher. If we take a look at the chowder rule in the beginning of April 2015, it was 11.2. The dividend yield was 3.2 and the 5 year dividend growth rate was 8.0. The latter will be influenced by this increase in a negative way.

Despite of the slightly disappointed dividend increase I bought PG for my Vrijheid Fonds just a few days after their announcement. Because PG is a solid company with some big household names. Take a look around your household and see how much PG products you have. You will be amazed.

After I bought the shares a little voice in the back of my mind kept asking: why is this increase so low? So I did some digging and searching on the Internet. I found 4 possible reasons.

First:
PG is operating in a market with a lot of competitors. The margins are (very) small. And for most of the products the demand remains the same over time. If I look at my own household, it is impossible to persuade me to use more detergent. So the demand side is (almost) stable. However the supply side is still growing. New companies emerge on the Internet that are offering the same product for a lower price. For instance, here in the Netherlands we have BoldKing who offers razor blades for lower prices than the PG razor blades (I love my Gillete razor blades).

Second:
I read in an editorial that PG made the decision a couple of years ago to focus on efficiency/margins instead of innovation. This can be one of the reasons why PG is losing their moat. Or is this only in my imagination?

Third:
A high payout ratio. PG already had a high payout ratio of around 70%. This is high for a dividend aristocrat. Put this together with the money PG is spending with their share buy back program and the payout ratio is even higher. With the recent increase the payout ratio is around 75%. So is there still some free cash flow available?

Fourth:
The last reason is of course the stronger dollar. PG sells around 2/3 of their products out side The States. With a stronger dollar, these products will be more expensive here in Europe. This will certainly influence their turnover and their profits.

All these possible reasons, in my opinion, are plausible. The only thing that is really bothering me is the increasing payout ratio. Will PG management be able to lower the payout ratio and in the same time give investors an ever increasing dividend? What will the future bring? I wish I had a crystal ball.

What do you think? Was the last dividend increase an omen for future increases? Or was this just a small hick up? I like to hear from you.

Thanks for stopping by and Cheers,

Pollie

DISCLAIMER: I’M NOT A REGISTERED INVESTMENT ADVISER, INVESTMENT PROFESSIONAL, BROKERAGE FIRM OR INVESTMENT COMPANY. READERS ARE ADVISED THAT INFORMATION ON THE WEBSITE IS ISSUED SOLELY FOR INFORMATION PURPOSES AND NOT TO BE CONSTRUED AS AN OFFER OR RECOMMENDATION TO BUY, HOLD, OR SELL ANY SECURITIES. ALL INFORMATION, OPINIONS, AND ANALYSES INCLUDED ARE BASED ON SOURCES BELIEVED TO BE RELIABLE, BUT NO REPRESENTATION OR WARRANTY IS MADE CONCERNING ACCURACY, CORRECTNESS, TIMELINESS, OR APPROPRIATENESS. PLEASE CONSULT WITH AN INVESTMENT PROFESSIONAL BEFORE INVESTING ANY OF YOUR MONEY.

Please follow and like us:
0

One thought on “A low dividend increase by PG, why?

  1. roadmap2retire

    Some great points and valid thoughts, Pollie. I dont own PG myself and like to read up on some of these dividend stalwarts everytime there are issues.

    Like you said – its probably a combination of the factors discussed. One point I’d make is that demand is probably not constant – esp when you consider the increasing population. Maybe in the western world – population has been stable and demand is stagnant – and I think companies like PG need to look at emerging/frontier markets for growth. But then again, they have to compete with startups and/or low priced competition. It is a tough market and the low margins are a bit of a concern.

    What I find really surprising is that they have are being vocal about not pursuing innovation – and instead concentrating on efficiency. Shedding some segments like Duracell etc may make the company leaner and will help them streamline over the long run, but it sure is a bit concerning.

    For now, I just watch from the sidelines and will not be initiating a position in PG.

    Best wishes
    R2R

Leave a Reply

Your email address will not be published. Required fields are marked *