This U.S. dividend giant is regaining its form

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John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

I've held shares of Procter & Gamble Co. since my Strategy Lab model dividend portfolio was launched back in September, 2012, and I've owned P&G personally for even longer.

But it wasn't until this past weekend – in anticipation of writing this column – that I did an inventory of all the P&G products in our house.

My search of our bathroom, kitchen and laundry room turned up the following items: Crest toothpaste, Oral-B dental floss, Oral-B toothbrushes (both electric and manual), Olay body wash, Febreze anti-odour spray, Swiffer wet mopping cloths, Tide detergent and Ultra Downy fabric conditioner. Ten years ago, Pampers diapers would have also made the list.

Our household is probably fairly typical. Globally, P&G has 22 brands that generate more than $1-billion (U.S.) in annual sales each, and another 19 with revenues of more than $500-million. Even as P&G has struggled in recent years – more on that in a moment – its brands remain among the most trusted by consumers around the world.

As much as I like P&G's products, I'm an even bigger fan of the stock.

Since my Strategy Lab portfolio's inception, P&G has been the top-performing company. The shares have gained about 20 per cent in U.S. dollars and – thanks to a strong tailwind from the falling loonie – they've surged more than 60 per cent in Canadian currency.

A tumbling loonie wasn't part of my investment thesis, but a rising dividend most certainly was, and in that regard P&G has also delivered: The company has raised its dividend three times since I "purchased" it for my Strategy Lab portfolio, extending its string of consecutive annual increases to 59 years. I have no doubt that P&G will raise its dividend again in April – when it typically announces increases – making it 60 years in a row.

I'm pleased with P&G's performance. But I believe the stock – which has outperformed the S&P 500 in recent months after years of lagging the index – has even brighter days ahead as the company sees the fruits of a sweeping restructuring.

Faced with multiple headwinds – including a strong U.S. dollar, growing private label competition and sluggish sales – P&G has been selling off dozens of non-core brands and taking a hatchet to costs. The goal is to transform itself into a faster-growing, more profitable company by focusing on 10 product categories with about 65 dominant brands (down from 166 brands before the restructuring was launched). In February, for instance, P&G closed the sale of its Duracell battery business to Berkshire Hathaway Inc., and in the second half of 2016, P&G expects to conclude the sale of 43 beauty brands to Coty Inc.

"Investors will need patience here, but we believe recent initiatives to improve PG will pay off in due time," Edward Jones analyst Jack Russo said in a Feb. 29 note. Mr. Russo reiterated his "buy" rating on the shares, citing P&G's "product and geographic diversity, the company's leading brands/market shares, our belief that a turnaround could begin later in 2016 and finally its healthy dividend yield" of about 3.2 per cent.

Under new chief executive officer David Taylor, a P&G veteran who took the helm in November, the company is beginning to show improved results. Even as sales fell 9 per cent in the fiscal second quarter ended Dec. 31, organic sales – which exclude the effects of foreign exchange and acquisitions and divestitures – rose 2 per cent. Core earnings – excluding restructuring costs – increased 9 per cent, or 21 per cent on a constant-currency basis.

What's more, P&G's core operating profit margin improved by 3.4 percentage points, indicating that its cost-cutting and brand-pruning efforts are delivering results, while adjusted free cash flow (operating cash flow minus capital expenditures) rose 28 per cent to $3.79-billion – giving the company more ammunition to repurchase shares and increase dividends.

While these results mark an improvement, they fall short of what will be needed to drive the stock appreciably higher, some analysts say.

"For there to be significantly more upside in PG shares from here, we believe the company would need to get back on a path of consistent [market] share gains – placing the company closer to 4- to 5-per-cent organic growth," RBC Dominion Securities analyst Nik Modi said in a recent note.

P&G's shares have had a good run lately and, with a price-to-earnings multiple of more than 20 based on fiscal 2017 estimates, they're not exactly cheap. I won't be adding to my position here, particularly given the risk of a rising Canadian dollar, but I'm happy to hold my shares in anticipation of annual dividend increases and further benefits from P&G's ongoing restructuring.