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P&G – Low Capital Gains but Consistent Dividends

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Revenue growth prospects for The Procter & Gamble Company (PG) are not strong but high cash flows, a higher dividend forward yield of 2.96% compared to 2.59% for 10-year US treasury bonds and a strong balance sheet all point to consistent yield growth in the future. Bidness Etc believes that the stock is a buy for dividend investors.

Introduction

P&G has paid dividends to shareholders every year since its incorporation in 1890. Remarkably, the company has raised dividends annually for the past 57 years straight. Its payouts have grown at a rate of 7.9% annually over the last three years alone, and 8.8% annually over a five year period. Moreover, its last twelve months dividend yield is 2.9%.

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The company paid a dividend of $2.29 during FY13, an increase of 7% from the prior year. The next quarter payout of $0.6 is due on November 15, and P&G is expected to sustain this growth in future.

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Improvement in Cash Flows

P&G’s Cash Flows from Operations (CFOs) increased from $13.1 billion in fiscal year 2012 (FY12) to $14.9 billion in FY13. The company returned a total of $12.5 billion to its shareholders in dividends and share repurchases during FY13, a higher amount than the $10.2 billion it returned in FY12. The improvement in CFOs, along with a 3% rise in current annual CFOs compared to its five-year average, reflect the company’s ability to sustain cash returns to its shareholders in future.

The company increased dividend payments even during during years when its CFOs decreased, which shows good corporate governance practices and the importance of shareholders for P&G.

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Furthermore, the company’s free cash flows to equity (FCFE) have improved from $9.8 billion in FY12 to $13.1 billion in FY13. FCFE was even higher compared to $12.5 billion in FY09 despite higher capital expenditure (capex) and slightly lower CFOs compared to that year.

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Improved Dividend Coverage

The company’s dividend coverage* improved from 2.2x in FY12 to 2.6x in FY13, and is currently equal to its five-year average of FY13.

*Dividend Coverage = Ex-Capex FCFE / Dividends Paid

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Improved Debt-to-Equity (D/E) Ratio

P&G’s total D/E ratio improved from 58.3% in FY09 to 45.9% in FY13, but is still about 3.3ppts (percentage points) lower compared to the five-year average. The improvement in D/E makes it easier for the company to fund capital expenditure and other cash requirements by borrowing more debt, even if its CFOs fall in the future.

Furthermore, the company’s current cash balance of $6.1 billion is sufficient to pay for the $5.9 billion worth of debt maturing in 2014. These factors make the company’s liquidity position even more stable.

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High Credit Ratings

Moody’s Investors Service and Standard & Poor’s maintain a stable outlook for P&G. The agencies have given higher investment grade long term credit ratings to P&G of Aa3 and AA-. The high credit ratings allow the company to borrow debt at lower costs. Its average current cost of debt is 1.4%.

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Conclusion

Strong fundamentals, high cash flows to keep funding capital expenditures and stable dividend growth make P&G a good stock for dividend investors. High credit ratings and stable outlooks given by credit rating agencies further validate the fact that the company is not exposed to any solvency risks and can maintain the strength of its balance sheet in future. The company also boasts a higher forward yield by almost 0.4ppts compared to 10-year US treasury bonds.

In addition, improvements in CFOs, FCFE and dividend coverage ratios may lead to a higher increase in dividends in the last quarter of FY14, compared to an increase of 7% in the fourth quarter of FY13. Thus, although P&G’s revenue growth prospects are not very good and the stock does not promise capital gains, Bidness Etc believes that the stock is a good buy for long-term dividend investors.

Potential investors looking for analyses of the company’s revenue growth prospects should read Bidness Etc’s articles ‘P&G: Lafley’s There, but Not There Yet!’ and ‘P&G Earnings Review – Procter’s Gamble Yet to Pay Off’.

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