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Assessing P&G's Declining Level of Dividend Increases

Saturday - 4/27/2013, 4:10pm  ET

Procter & Gamble is one of the most popular dividend stocks in the world with an impressive payout history that includes 122 years of uninterrupted dividends and 57 years of consecutive annual dividend increases.

Its current dividend yield is 3% and with a payout ratio of 54%, P&G  has the capability  of significantly boosting its dividend. P&G has averaged an annual dividend increase of 10.8% per year over the last 20 years. However, its dividend increase average has dropped to 8.5% over the last five years and P&G's most recent dividend increase announced in February was only 7%.

A 7% dividend increase is better than most, but the issue is that the level of P&G's dividend increase has declined each of the last five years. This downward trend of dividend increases is a red flag indicating that P&G's business model may have some problems and that investors should reevaluate the company to determine if it deserves a spot in their portfolio.

Procter & Gamble is not the only blue-chip company  with declining dividend increases. Healthcare giant Johnson & Johnson has also lowered its level of dividend increases over the last several years.

Johnson & Johnson has increased its annual dividend an average of 12.6% over the last 20 years but over the last five years has only averaged an increase of 8%. Johnson & Johnson currently yields 2.9% and will be announcing its next dividend increase within the next month. With a payout ratio of 61%, I am hopeful for an improvement over their last two dividend increases of 7% and 5.5%.

Wal-Mart Stores , on the other hand, recently came through with an impressive dividend increase of 16%, which boosted its yield up to 2.4%. Wal-Mart's annual dividend increases have averaged 18.8% over the last 20 years and 14.7% over the last five years. With a payout ratio of only 31%, Wal-Mart's dividend excellence should continue well into the future.

Is Procter & Gamble a worthy candidate for your portfolio?

Procter & Gamble is a consumer-products powerhouse with 2012 sales of $83.7 billion. Its very impressive group of brands include 25 blockbusters with annual sales of more than $1 billion. P&G's  earnings have been flat over the past five years, which I suspect is the main reason for its reduced level of dividend increases. The following points illustrate why P&G's earnings have struggled:

  • Economic conditions during the great recession were brutal and the recovery has been very slow.
  • Generic products that compete with P&G's brands are available at much lower prices.
  • Although the quality of P&G's products are much better, some consumers are forced to buy the generic products due to the poor economy.
  • There were a series of circumstances beyond P&G's control that negatively affected earnings, such as increases in material costs and higher tax rates.
  • Additional investments have been made in an effort to expand opportunities in emerging markets. These investments should pay off in the long term but have negative effects over the short term.
  • P&G is focused on providing the highest quality and most innovative products available today. This requires extensive R&D costs, which can have a detrimental short-term effect on earnings.

The Foolish bottom Line

After taking all of these points into consideration, I believe that most of these items that are out of Procter & Gamble's control will improve over time and that their investments in emerging markets and product innovation will pay off.

This belief was reflected in P&G's 2Q and 3Q earnings reports, which were both improvements over last year's results. However, its 4Q guidance was lower than analysts expected, resulting in a 6% decline in the share price. With shares at an all-time high, a pullback of this level is not surprising. After these improved results, I am hopeful for an improvement in P&G's dividend boosts in upcoming years.

After this sell-off,  I believe that now is a good time to consider Procter & Gamble as part of a diverse, well managed portfolio.

This article was originally published as Assessing P&G's Declining Level of Dividend Increaseson

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