Procter & Gamble (NYSE: PG) is the largest company in the consumer staples industry globally, boasting a market capitalization of around $385 billion.
The company sells its products in more than 180 countries, owning some of the most recognizable brands in the world in its diversified portfolio.
Examples include Pampers, Luvs, Tide, Gain, Bounty, Charmin, Puffs, Gillette, Head & Shoulders, Old Spice, Dawn, Febreze, Swiffer, Crest, Oral-B, Scope, Olay, and many more.
The company has been appreciated highly amongst income-oriented investors due to featuring one of the most impressive and robust dividend growth track records.
While I admire the company’s qualities and growing payouts, I believe that the stock has gotten increasingly pricy, leaving little to no room for further upside at its current levels. For this reason, I am neutral on the stock.
Back in October, Procter & Gamble posted its Q1 2022 results, featuring a very solid performance. During the quarter, the company produced $20.3 billion in sales, a 5% growth compared to Q1 2021.
Higher sales were attributable sales growth of 5%, 5%, 8%, 5%, and 3% in the company’s Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care divisions, respectively.
Adjusted EPS came in at $1.61 compared to $1.63 in the comparable period last year, while management guided for revenue growth of 2% to 4% and EPS growth of 3% to 6% for FY 2022.
Procter & Gamble has paid a dividend for 131 years. It has also increased its dividend for 65 consecutive years, which is one of the longest active streaks of any company.
This places the company on the elite S&P 500 Dividend Aristocrats index, which includes companies that feature a track record of more than 25 annual consecutive DPS hikes. Few Dividend Stocks boast of such a track record.
The latest dividend hike back in April was by an impressive 10% to a quarterly rate of $0.8698. This DPS hike far outpaces even the current accelerated inflation levels, which income-oriented investors should highly appreciate.
Further, due to the majority of Procter & Gamble’s products comprising daily necessities, their demand is highly inelastic. This means that if inflation continues to hover at the current worrying levels, the company can still substantially increase prices without suffering a significant, if any, disruption on the demand side.
Hence, Procter & Gamble can be considered a rather inflation-proof company, which should translate to in-line or above-average inflation dividend growth prospects moving forward.
Assuming Procter & Gamble’s FY 2022 earnings report ends up with EPS of around $5.92 (in-line with management’s outlook), this implies a payout ratio of just under 60%. Hence, the company can easily sustain robust DPS hikes from this perspective as well.
Based on the aforementioned FY2022 EPS estimate, Procter & Gamble’s shares are currently trading with a (forward) P/E of around 26.9 attached. In my view, this is a premium multiple for a company in the industry.
While I appreciate Procter & Gamble’s unique qualities and strong dividend growth prospects, I believe that a fair multiple for the stock would be in the low 20s based on this year’s expected earnings growth and overall investment case.
Wall Street’s Take
Turning to Wall Street, Procter & Gamble has a Moderate Buy consensus rating based on four Buys and three Holds assigned in the past three months. At $155.71, Procter & Gamble stock projections suggest 2.3% downside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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