Does your portfolio need more exposure to the relatively safe consumer staples sector? How about dividend income? Maybe you're even considering a stake in The Procter & Gamble Company(NYSE: PG) but can't quite convince yourself to take the plunge. That's certainly understandable. The stock isn't cheap right now, and it's not like there's a ton of growth opportunity for this already-enormous outfit.
Just be careful of talking yourself out of a great stock pick. There are plenty of good reasons to take a swing at P&G at this time. Here are my top three.
1. It's got multiple category-leading products
Being a market-share leader doesn't inherently make the company's stock a buy. On the other hand, a category leader is usually a category leader for good reason. That reason is, the product is a superior one, and the company behind it knows exactly how to market it.
To this end, know that P&G owns the leading brand in several different categories of consumer goods. It makes many products you likely know, ranging from Pampers diapers to Tide laundry detergent to Gillette razors to Crest toothpaste, just to name a few. Roughly a dozen of its brands are U.S. market-share leaders at any given time and by more than a little.
Its Bounty paper towels, for instance, generate on the order of five times as much annual revenue as its nearest rival. Ditto for Gillette. P&G is even dominating the crowded laundry detergent market, with Tide products outselling the second-biggest domestic competitor by a ratio of four-to-one. Connect the dots: P&G is clearly doing something right.
As was noted, leading multiple markets doesn't necessarily make shares of the company behind those leading products a buy. Realistically speaking, it's tough to topple a category leader if for no other reason than the purchase of these companies' products eventually becomes a no-thought habit.
In P&G's case, this habit is further fueled by about $2 billion worth of annual brand "superiority" research and development, allowing the company to avoid entering a price war no combatant ever really wins. That's a powerful advantage, and a big part of the reason P&G's been able to plow right through the recent wave of inflationary pressure.
2. Size matters
Greater size can be a disadvantage if a company doesn't deliberately manage the complexity and bureaucracy that often materializes with size. But P&G handles its heft rather well. The company regularly assesses and restructures as necessary, shedding the unplanned bloat that so easily builds when a large corporation isn't looking.
The company still retains all the advantages that do come with greater size, however. Take its marketing budget as an example. P&G is frequently the world's single-biggest advertiser in terms of total ad spending, shelling out on the order of $8 billion per year on TV, print, digital, and in-store promotional activity. Smaller rivals like Clorox and Unilever just can't keep up.
The competitive edge stemming from sheer size doesn't end there. With a bigger lineup of market-leading products, P&G also enjoys a great deal of leverage with its retail partners like Walmart and Kroger. This often leads to prominent placement of its products in stores as well as co-advertising spending, just to name a few benefits.
And yet, there's still more P&G can pay for that its competitors would find more challenging to do. The company's made major investments in artificial intelligence, for instance, which is being used in a variety of ways, like more efficient manufacturing and even more effective advertising.
3. P&G's got an outstanding dividend pedigree
Last but not least, interested investors can comfortably expect P&G to remain the dividend juggernaut that it currently is. P&G hasn't merely paid regular dividends for several decades now. As of this year, the company's upped its annual payout for 67 years in a row. As one of the market's longest-tenured dividend-growth outfits, P&G is going to do everything in its power to maintain this uninterrupted streak of yearly dividend-payment increases.
Perhaps more important than P&G's dividend track record is the fact that the company can afford to make these dividend payments without undermining its ability to invest in its own growth. For its fiscal 2023, ended in June of last year, P&G reported a profit of $5.90 per share and paid dividends of just under $3.68. This dividend-payout ratio of 62% leaves enough earnings behind to provide P&G with some fiscal flexibility or even fund stock buybacks.
Newcomers right now will be buying into P&G stock while the dividend yield is a respectable 2.3%. For perspective, the S&P 500's current dividend yield stands at 1.35%.
Weighing the upside against the downside
There are downsides in owning a stake in P&G as well. Its lack of growth is a big one. This year's expected top-line growth of 3.4% and next year's similarly modest projection of 3.9% is actually the long-term norm here; you can certainly find faster-growing prospects. This stock isn't exactly cheap either, priced at 25 times this year's projected per-share earnings.
Just keep the bigger picture in mind. Investors can expect -- and should be willing -- to pay a premium for a reliable, quality pick and a strong dividend payer. Procter & Gamble may just be what your portfolio needs right now.
Should you invest $1,000 in Procter & Gamble right now?
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool recommends Kroger and Unilever Plc. The Motley Fool has a disclosure policy.
