Tuesday, June 24, 2008

* Stock Analysis: Procter & Gamble Co. (PG)

Linked here is a PDF copy of my analysis of Procter & Gamble Co. (PG) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. PG is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, PG is trading at a 6.2% discount. A Star is added since PG is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. PG earned two Stars in this section for 3.) and 4.) above. It has paid a cash dividend to shareholders every year since 1891 and has increased its quarterly cash dividend payments for 52 consecutive years. The "1-Yr. > 5-Yr Growth" metric indicates that PG's dividend growth has experienced acceleration.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. Unfortunately, PG earned no Stars in this section. The NPV MMA Diff of $2,265 is is below the level I like to see for a blue-chip company. The 11 years needed for the dividend income to equal a MMA paying the long-term average rate of 4.61% is one more then the 10 years maximum I like to see.

Other: PG is a well-managed company that produces consumer staples. PG's ability to consistently grow its dividend over different economic cycles has made it a staple in most dividend investors portfolio. The risk of PG experiencing a significant downturn is less than most companies since demand for household and personal care products is generally stable and not affected by changes in the economy or geopolitical factors.
Conclusion: PG earned a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned no Stars in the Dividend Income vs. MMA section for a net total of 3 Stars. This rates PG as a 3 Star-Hold.

PG is one of those Blue-Chip stocks that I would love to have in my portfolio. It has made significant strides since I reviewed it back in February. At that time it rated as a 0 Star-Avoid stock. What's changed? At that time it was selling for $66.21 vs $63.13 today; it has increased its dividend resulting in a current yield of 2.47% now vs 2.12% in February. The NPV MMA Diff is now $2,265 vs a negative $900 in February.

Am I ready to buy? Not quite, but it is getting very close. Using my [D4L-PreScreen.xls]model I determined that a price of $58.11 would lower the "Years to >MMA" to 10 and increase NPV of MMA Differential to over $3,000. I would be very comfortable initiating a position between $58 and $60.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not own shares of PG (0.0% of my Income Portfolio).

What are your thoughts on PG?

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