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Procter & Gamble kept has sustained a 58-year trend of raising its quarterly dividend. (Phil Coale/AP)
Procter & Gamble kept has sustained a 58-year trend of raising its quarterly dividend. (Phil Coale/AP)

YIELD HOG

Procter & Gamble: Predictability that dividend investors love Add to ...

I hate uncertainty in my life. That’s one of the reasons I love dividends.

Nobody knows what the stock market will do from one day to the next, but I can tell you exactly when my dividends will get paid. In many cases, I even know when companies will raise them.

Case in point: Procter & Gamble Co.

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This week, the consumer products giant hiked its dividend by 7 per cent to $2.57 (U.S.) on an annual basis. The stock now yields about 3.2 per cent.

I own P&G both personally and in my Strategy Lab model dividend portfolio (tgam.ca/Dx1K), so I am delighted with the increase. I’m not surprised, however.

Cincinnati-based P&G has raised its dividend for 58 consecutive years, and lately it’s been announcing hikes in April. So it didn’t take a genius to see the most recent increase coming.

The company’s record of uninterrupted dividend payments goes back even further – 124 consecutive years to be precise, spanning wars, recessions, depressions and assorted financial panics. Clearly, P&G is a company with formidable staying power, which is one of the qualities I look for in a stock.

When I invest, I’m not trying to make a big score overnight. That would entail too much risk. Rather, I’m looking ahead 10 or 20 years. As long as sales, earnings and dividends are growing, there’s a good chance the stock price will be materially higher in a decade or two. Adopting a long-term mindset frees me from the stress of the market’s daily gyrations.

True, businesses can blow up. So it’s critical to choose companies that are well-financed, have an entrenched market position and won’t be vulnerable to disruptive changes in technology. Selling everyday products that people need in good times and bad also helps.

Procter & Gamble meets those tests in spades. It has a portfolio of more than 250 products, with about 22 “megabrands” that generate sales of more than $1-billion each (Tide, Crest, Pampers, Duracell, Pantene and Iams among them). It’s diversified globally, with developing markets accounting for about 45 per cent of sales. And it has a double-A credit rating, which gives it the flexibility to reinvest in its business and grow through acquisitions.

“Consumer products companies succeed or fail on the strength of their brands. P&G’s brand portfolio is unparalleled in our view,” Jack Russo, an Edward Jones analyst who has a “buy” rating on the shares, said in a recent note.

Driven by sales growth and cost cuts, P&G’s earnings per share are expected to increase by about 8 per cent annually for the foreseeable future, Mr. Russo said. Another plus: The payout ratio is less than 60 per cent of estimated 2014 earnings, giving the company additional flexibility to raise the dividend, which has grown at an annualized rate of 8.5 per cent over the past five years.

Every company has hiccups, and P&G is no exception. In February, it lowered its sales and earnings guidance for the fiscal year ending in June, citing the unfavourable impact of weaker currencies in Venezuela, Argentina, Brazil, Turkey, South Africa, Russia and Ukraine.

The company now expects core earnings per share to grow by 3 to 5 per cent, even as core earnings on a currency-neutral basis are expected to rise by 12 to 14 per cent.

But the earnings warning had a silver lining for investors looking for a good entry point.

Perhaps in anticipation of the bad news, the stock tumbled about 12 per cent in late 2013 and early 2014. It has since recovered about half of that ground, but still trades at a reasonable 17.7 times estimated fiscal 2015 earnings, compared with 18 for Unilever, 19.8 for Colgate-Palmolive and 20.5 for Church & Dwight.

No stock is risk free. P&G faces intense competition from makers of brand-name and private-label consumer products, and its growing presence in emerging markets leaves it vulnerable to economic, competitive and political trends in those countries. For Canadian investors, changes in the U.S.-Canada exchange rate can affect the value of U.S. stocks when priced in loonies.

Those risks aside, P&G is a company with a proven track record and will almost certainly make buy-and-hold dividend investors happy over the long run.

Follow on Twitter: @johnheinzl

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