Procter & Gamble: Reliable Income

11/17/2015 7:00 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

Our latest featured buy recommendation is one of the most reliable US-based dividend stocks, with some of the best known brands in consumer products including Crest, Gillette, Pampers, and Tide, notes Patrick McKeough, editor of TSI Network.

Procter & Gamble (PG) has raised its dividend for each of the past 59 years. Still, the mark of a successful company is its ability to make the necessary adjustments to keep on growing.

The company has been selling off some of its less profitable brands over the past few years. While these product sales cut into current earnings, they also give Procter a large infusion of cash for efficiency improvements, share buybacks, and more dividends.

Wal-Mart (WMT) supplies 14% of the company’s sales. In the past few years, Procter has sold many of its less profitable brands, including its recent deal to transfer 43 beauty product lines, including Wella, Clairol, Max Factor, and CoverGirl, to Coty, Inc.

Instead of a typical sale, which would result in a large tax bill, the company will split-off these brands into a separate firm that will later merge with Coty (COTY).

Procter will then give its shareholders the option of exchanging all or some of their shares for Coty stock. Following the deal, Procter investors would hold 52% of the combined firm.

The company expects to realize a gain of $5 billion to $7 billion when it completes the merger in the second half of 2016.

Procter’s balance sheet remains strong. As of September 30, 2015, its long-term debt was $17.4 billion or just 8% of its market cap. It also held cash of $12.6 billion.

The company is using the cash from its asset sales to boost its efficiency, including streamlining its supply networks and distribution channels. It feels these actions will cut $3.0 billion from its annual costs when it completes the plan by the end of fiscal 2017.

These savings will give Procter more cash for share buybacks and dividends; it repurchased $4.6 billion worth of its stock in fiscal 2015.

The company has raised its payout for 59 straight years. The current annual rate of $2.65 a share yields 3.4%.

International markets supply two-thirds of Procter’s sales and the high US dollar will probably cut its 2016 earnings to $3.76 a share.

The stock trades at 20.5 times that forecast, which is still a reasonable multiple in light of its well known brands and improving long-term profitability. We rate the stock a buy.

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