P&G's Attractive Dividend Should Continue to Grow

Erin Lash: Wide-moat Procter & Gamble pays one of more attractive dividends across the household and personal care landscape with a dividend that yields north of 3% annually, far in excess of the low single digits it's peers boast. From our vantage point, P&G's commitment to returning excess cash to shareholders is evident in the fact that its paid a growing or stable dividend for nearly 130 years. We anticipate that it will continue to prioritize returning excess cash to shareholders. As we forecast, its dividend will grow at a mid- to high-single-digit clip annually over the course of the next 10 years.

Looking back, P&G has focused more recently on further bolstering its competitive position by shedding more than half of its brands as a means by which to focus on its highest return opportunities, while also also extracting excess costs, the combination of which we think stands to bolster profitability and further free up funds for the firm to allocate to bolster shareholder returns. As such, we forecast that P&G will direct around 70% of its annual earnings toward the payment of dividends for the benefit of shareholders going forward.

Despite its leading competitive edge, we believe that Procter & Gamble is not immune to the intense competitive headwinds that are plaguing its peers. More specifically, Procter & Gamble has chalked up stagnant top-line growth over the recent past. As other global branded players, lower price private label fare, as well as small niche operators work to chip away at Procter & Gamble's leading share position. However, we view the firm's efforts to reinvest behind its brands, both in the form of marketing as well as product innovation, as a means by which to offset these headwinds.

From a valuation perspective, we think Procter and Gamble's stock is attractively valued, trading at around a 10% discount to our valuation. When combined with its attractive dividend yield, we think long-term investors would be wise to stock up on this wide-moat name.