Before You Sell P&G Consider This

12 Apr 2016 23:13

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Yesterday Procter & Gamble (PG) announced a 1% increase in its quarterly dividend. Blogs and forums were buzzing with the news and many investors expressed their disappointment with the increase.

The purpose of this post is not to express disappointment but to address something I’ve seen in many posts that may be misleading some investors to sell. The comment I have seen was

“….this is one of the smallest increases in PG’s dividend growth streak, I am considering selling some or all my shares.”

While this is technically accurate by itself I would argue it is inaccurate when you factor in the inflation rate. A 1% increase with low inflation might be better than a 5% increase with high inflation. If the 1% increase is your only inspiration to sell PG right now I ask you consider the following analysis prior to making a final decision to sell.

Before I continue on with this I first need to clarify that PG’s dividend increase is not 1% from an annual perspective. The total 2016 dividend payout will be $2.671 per share and compared to 2015’s payout of $2.632 per share this is actually a 1.48% increase. Still not a great number but better than 1%.

Currently the U.S. Inflation Rate average for 2016 is 1.2% with end of year forecasts closer to 1.9%. Ouch, the dividend increase fails to match or beat forecasted inflation by 0.42%! Yet, this is not the first time PG has failed to beat inflation and in fact committed this crime 6 times before 2016.

1974 1980 1981 1983 1987 1988 2016*
Div Growth 7.12% 9.10% 8.34% .01% .93% 3.7% 1.48%
Inflation 11% 13.50% 10.30% 3.20% 3.60% 4.10% 1.90%
Difference -3.88 -4.40 -1.96 -3.19 -2.67 -0.4 -0.42

When looking at the table above 1983, 1987 and 2016 are the lowest three years of dividend increases but when we factor in inflation suddenly 1980, 1974, and 1983 are significantly worse. Without the table above there is no way I could explain to a reasonably sane person that a 1.48% increase is greater than a 9.10% increase.

The conclusion is that PG has had small increases in dividend growth throughout its streak and when it does occur you want it to be during a period of low inflation. When you look at 2016’s dividend growth it is not as bad as you may perceive.

On a personal note, I am a PG holder and do not plan to sell any shares based on this one data point. My concern with PG is the lack of vision management is providing on how they plan to invest all of the funds they are getting from divesting certain businesses and this is the primary reason I do not plan on adding more PG shares and currently rate PG a hold.

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