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Stock Analysis: The Procter & Gamble Company (PG)

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May 13, 2010 – Comments (1) | RELATED TICKERS: PG

Linked here is a detailed quantitative analysis of The Procter & Gamble Company (PG). Below are some highlights from the above linked analysis:

Company Description: The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

PG is trading at a discount to 1.) and 3.) above. Since PG’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 17.7% discount to its calculated fair value of $75.54. PG earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

PG earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. PG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 53 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

PG earned a Star in this section for its NPV MMA Diff. of the $1,294. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PG has. If PG grows its dividend at 9.9% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.02%. PG earned a check for the Key Metric ‘Years to >MMA’ since its 4 years is less than the 5 year target.

Other: PG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: PG earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks PG as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $82.84 before PG’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 53 years of consecutive dividend increases. At that price the stock would yield 2.18%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 7.1%. This dividend growth rate is less than the 9.9% used in this analysis, thus providing a margin of safety. PG has a risk rating of 1.25 which classifies it as a low risk stock.

PG is one of the few premier dividend growth stocks. As a company, it is a leader in understanding consumer needs, marketing and building brand loyalty. After stumbling in the last economic downturn, PG’s new CEO has implemented plans to grow revenue and earnings. Going forward, the company’s broad product portfolio and sizable distribution network will continue to be a strengths, along with its balance sheet and free cash flow. As my allocation allows, I will continue to buy PG while it is trading below my buy price of $75.54. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in PG (3.6% of my Income Portfolio). See a list of all my income holdings here.

 

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1 Comments – Post Your Own

#1) On May 13, 2010 at 9:05 AM, hybridinvestor (85.45) wrote:

PG is no doubt a great company, but I don't agree with buying under $75 as it is anything other than fairly valued or more at the current price.  Caveat, I am a "the bigger it is the cheaper I want it" kind of investor though because I simply believe in the law of large numbers.  Once a company gets as big as PG, WMT, etc., it becomes significantly harder to make a difference to the bottom line.

The best time to buy these companies are in times of market panic where one can actually get good enough prices that the return becomes worth sitting and waiting on.

What's the saying.  "It's not enough to buy great companies.  You also have to get them at great prices."  Great prices on a stock like PG give you a margin of safety against lack of any real return except over very, very long times.  Not saying I am not a long-term investor but my target is more like 3-5 to 7ish years and I am looking for companies that can double their footprint over that time period. 

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