Investment Thesis – Procter & Gamble (PG)

Historical Growth data

  • Strong dividend growth track record (Dividend King) with average 70% payout ratio (from earnings) but slowing dividend growth in recent years (8% average YoY dividend growth before 2014 and 2% after 2014)
  • Large FCF available (FCF yield = 4.8%) although no discernible pattern
  • Falling revenue over last 4 years in part due to sales of several low-margin low-profit brands

Competitive Advantage (Moat)

  • Strong brand loyalty from the premium quality and high value products sold (market leaders in many of their core brands)
  • Products sold are daily-use products

Future Growth potential

  • PG sold away 2/3 of their brand holdings from 170 to 65 in order to focus on the most promising brands (brands sold were those with low margins and low growth)
  • Resilient to recessions (as seen from 2007-09 Financial Crisis)
  • Strong growth potential in emerging economies (35% of sales in emerging regions and 55% of sales outside North America, only 8% of sales in China and 7% of sales in IMEA)

Micro-related risks

Macro-related risks

  • Intense pricing pressures in retail sector from increased transparency, competition from online & offline retailers, and slowing market growth
  • Currency fluctuation greatly impacts revenues of the company but does not affect fundamentals of the company

Current valuation

  • PE ratio of 20.8
  • Lowest PE ratio in 3 years
  • PE ratio lower than S&P500 PE of 25.7

Verdict

  • Despite retail sector problems and worries of low margins, strong dividend safety, strong branding, low valuations, and opportunities in emerging economies makes this a safe business to invest in
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