Today it is time for another stock analysis Pollie style. Lets take a look at a company that provides good for daily use. Whatever Mister Market will bring us in the next years, one thing is certain: we all still need shampoo, laundry detergents and for those among us with little kids, disposable nappies. This is also a company that normally is less affected in a Bear market.
This analysis is on The Procter & Gamble Company (PG).
Company (from google finance): The Procter & Gamble Company (P&G) is focused on providing consumer packaged goods. The Company’s products are sold in more than 180 countries and territories worldwide primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, e-commerce and high-frequency stores, and the neighborhood stores, which serve many consumers in developing markets. As of June 30, 2014, the Company had five reportable segments:
- Health Care;
- Fabric Care and Home Care;
- Baby Care and Family Care.
If you still don’t have a clue about which company I’m talking, just think of, Ariel laundry detergent, Braun appliances, Duracell batteries, Febreze odor control, Head&Shoulders shampoo, Oral-B dental products, Wella hair care products, Gillette razors and Vicks cough and cold products. These are just a few of the brands of PG. By the way, these brands have a net sale of more than US$1 billion annually.
PG competes with companies like Unilever (NSYE: UL), Kimberly Clark (NYSE: KMB) and Colgate-Palmolive (NYSE: CL).
Can I explain this to a 10-year old? What Does This Company Do?
PG is a company that makes shampoo for all of us, razors for daddy, household appliances for mommy and your nappies when you were young.
Dividend Aristocrat: PG is paying Dividend for 58 years in a row! And is a Dividend Champion. It is number 7 on the CCC-list form David Fish! And is a 4 star stock on Morningstar.com. This looks like a fine and solid investment. That’s a Pass!
Dividend Yield > 2.5%: The dividend Yield of PG is 3,07%. This is right on the industry average. The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 66%. This is way below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. And that makes me happy! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 en 10 years are 7.0, 7.9, 8.8, 10.6. This shows a healthy (expected) increase over the years. With a 3 years average over 7% that makes me excited. So PG also passed the fourth Pollie-code.
P/E-ratio < 15: The industry average is 22.0. PG has a current P/E ratio is 21.4 (and declining when I wrote this. The market is slowly losing ground. And yes I’m getting more and more excited. I see buying opportunities 😉 ). These are almost equal. And it is slightly above the 5-year average P/E of PG (19.0). This is a clue that the stock might be overvalued. If we look at the current ratio we can say that is above the requirement of the Pollie-Code. Therefore this is a fail on the Pollie-code.
EPS > 0: The EPS is 3.91. So PG also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 16.80%. Another pass.
Market Cap. > 100M: No problem at this point. More than $ 226.683 Mil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 11.9. This is just below the requirements of the Pollie-Code. This is therefore a fail on the Pollie-code.
Stock price 52wk high-25%: The 52 wk high and low are: 85.82 and 75.26. This means that PG will be in my buying zone when the stock price is below 83.18 ((85.82-75.26)*0,75 + 75.26). At this moment PG is trading for $84.06. Therefore it is a fail on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for PG is 0.39.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to PG with D = $2.66, G = 7% (see Pollie-Code DGR) and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $88. At this moment PG is trading below its intrinsic value
Conclusion: When I look at the analysis, PG passed 7 out of 10 from the Pollie-code. The Pollie-code failed at the Chowder rule, P/E-ratio and stock price. If we take a look at Gordon Growth Model we can see that the stock is trading in the undervalued zone. So PG is buyable. This is a mixed signal with the tenth Pollie-code. Considering the P/E ratio, the stock price is on the high side. However in my opinion PG is a set & forget stock.
PG is definitely a great stock! Considering all the data PG is a stock that is (almost) buyable.
I certainly put PG on my watch list for my Vrijheid Fonds.
What are you – the readers, thoughts on The Procter & Gamble Company? Is it a buy?
Please comment on my analysis and thanks for stopping by!