Procter and Gamble Dividend Temptations

15 Oct 2015 19:54

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Over the last month and a half Procter & Gamble’s (PG) share price has dropped dramatically enough to sport a dividend yield from 3.6% to 3.8% well above its traditional yield at or near 3%. Many investors may see this as a value play but is it a wise investment at this time?

PG is a Blue Chip Dividend Aristocrat with a 59 year dividend growth streak. It has been a cornerstone of my dividend growth portfolio from day one and a longtime favorite. But from this investor’s point of view, any investment in PG is simply based on speculation more than fact. There are no signals to sell PG shares but at the same time nothing is screaming buy.

2015 for PG has been a pretty rough year. Sales have been declining which resulted in a 39% decline in earnings and a 20% decline in operating income. To top it off there is even more competition coming from low cost men’s razor clubs and a strong dollar has been negatively impacting their international earnings. Yet, as bad as these numbers sound it is still not a reason to sell.

PG is still a cash generating machine! Their gross profit rate sits at an impressive 49%. They are best in industry when converting accounts receivable into cash as seen by their receivables turnover ratio of 12.27 which means they can convert a receivable into cash in less than 30 days. And PG is far from being cash poor as they are sitting on $11.6 billion in cash and short term investments.

The most unclear signals coming from PG is their divestures. PG has been on a tear to reduce their product line-up by divesting and then focusing on a core set of products. Some of the major divestures include Duracell to Berkshire Hathaway for $2.9B and their beauty product lines to Coty for $12.5B. That will be quite a bit of cash coming in and there has been no clear direction as to how they plan to spend the cash.

Management has been very vague repeatedly stating that reducing their portfolio of products will allow for increased focus and growth on core product lines. Nice sales pitch but what are the details? How much of the funds will be invested into new capital equipment, research and development, or advertising? Are new acquisitions out of the question? Will any of it be returned to shareholders? Lots and lots of questions with no answers. Anything we as investors decide on at this time would be nothing but speculation that conditions will improve or worsen.

With an unclear future but strong cash flow it leads this investor to the conclusion of do not get seduced by the dividend yield or stock price and do not be afraid of the recent downturn in earnings. Don’t buy, don’t sell, simply just hold what you have.

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