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.
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).
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?
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?
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,
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