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Is Procter & Gamble's New Dividend Too Good to Pass Up?

Motley Fool - Wed Apr 17, 4:05AM CDT

It happens with regularity every April, but investors still love to see Procter & Gamble(NYSE: PG) announce its new dividend each year.

The consumer staples giant has one of the longest payout-boosting streaks on the market, with dividends rising each of the last 67 consecutive years. And P&G has been sending out dividend checks since it was founded in the '90s -- the 1890s, that is.

The hike that management announced for 2024 is more generous than investors have seen in recent years. It's only one part of a generous capital return program that includes heavy spending on stock buybacks, too. Let's take a look at P&G's new payout and whether it makes the shares a more compelling buy today.

The growth challenges

P&G hasn't posted impressive growth in recent quarters. Sales volumes turned negative over the past year, in fact. This slump coincided with slower price hikes to push organic growth down to just 5% in fiscal Q2 compared with 7% in the prior quarter. Most investors are bracing for more weakness ahead as sales gains land below that 5% rate for the full 2024 year.

P&G is facing several issues that could keep a lid on revenue growth for the next few quarters. Consumers are shifting their spending patterns back toward pre-pandemic norms, for one. And slowing inflation rates are removing the tailwind of higher prices that lifted sales for most of the past two years. The company is also struggling competitively in the Gillette shaving brand.

The good news is the company is still outgrowing peers like Kimberly Clark(NYSE: KMB), suggesting P&G's market share is holding up well amid a tough selling environment. And the slower growth has not hurt its earnings outlook. Instead, the company is projecting higher profit margin and accelerating earnings gains ahead in fiscal 2024. Those positive factors help explain why management felt confident in raising the dividend this time around.

The new dividend

The new dividend, which hits investors' portfolios starting in late April, moved to more than $1 per share to mark a 7% increase from the prior payment. That's more than double the percentage rate boost from 2023, when P&G raised its dividend by 3%.

PG Dividend Chart

PG Dividend data by YCharts

P&G can afford it given that profit margin is headed back toward its pandemic-era high of 24% of sales. The company is converting almost all of its earnings into free cash flow, meaning it can spend more on its dividend while still delivering extra cash to shareholders through stock buybacks. Look for $15 billion of spending in these categories in 2024.

Watch the stock

P&G's new dividend yields roughly 2.4% based on current stock prices. That's about a full percentage point higher than you'd get from owning the wider market through an S&P 500 index fund that yields about 1.4%, but an income investor can get meatier yields elsewhere in the consumer staples space. Rival Kimberly Clark, which isn't as profitable or growing sales as quickly, yields nearly 4% today.

P&G is valued at a large premium of nearly 5 times sales, or more than double what Kimberly Clark fetches. As a result, it's not worth buying P&G simply for its dividend, and the stock seems expensive as well. That's why income investors might want to watch Procter & Gamble for now and wait for a market decline to potentially offer up a better purchase price for this successful consumer staples giant.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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