Consumer Sector Ideas

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Procter + Gamble - >>> Coca-Cola Is a Rock-Solid Dow Dividend Stock, but So Is This Dividend King That Paid $9 Billion in Dividends Over the Last Year


by Daniel Foelber

Motley Fool

Jul 5, 2024


https://finance.yahoo.com/news/coca-cola-rock-solid-dow-075100352.html


Coca-Cola (NYSE: KO) checks all the boxes of a rock-solid dividend stock. It is an industry-leading, well-known business with diversification across beverage categories and geographic markets. It is a member of the Dow Jones Industrial Average, whose 30 components act as representatives of the broader market. It is also a Dividend King with 62 consecutive years of divined increases. And it has a compelling yield at 3.1%.

Procter & Gamble (NYSE: PG), commonly known as P&G, operates in completely different industries than Coke -- including fabric, home care, baby, feminine, healthcare, and beauty. But as an investment, P&G is very similar to Coke in that it distributes a boatload of money to investors through dividend payments.

Here's why P&G is a safe dividend stock that's worth a closer look.

P&G's multifaceted capital return program

P&G and Coke are two massive companies with sizable dividends. Their payouts are so large that P&G has paid over $9 billion to shareholders in the last 12 months while Coke has paid just shy of $8 billion -- earning both companies a spot on the list of the 10 largest companies by dividend expense.

The key difference between P&G and other companies that focus solely on a dividend is that it also buys back a ton of its own stock. P&G has reduced its share count by 12.9% over the last decade compared to just 1.8% for Coke. Reducing the share count increases earnings per share -- making the company a better value. P&G's consistent dividend, paired with its buyback program, more than makes up for its slightly lower yield of 2.5%.

Overcoming glaring challenges

The biggest issue with P&G in recent years is sales volume. The company has done a masterful job of improving operations and leveraging price increases. But brand consolidations and lower volume have resulted in very little sales growth -- just 12% over the last decade.

Still, P&G is undeniably a far better business today. As you can see in the chart, P&G's operating income has grown at a far higher rate than sales, indicating that it is expanding margins. When operating income grows faster than sales, it means a company is becoming more efficient and squeezing more profit out of each dollar it brings in from revenue. P&G's higher margins are a testament to its focus on quality over quantity. It has doubled down on its best brands rather than overexpand and become wasteful.

I'll admit, I had doubts about P&G, especially as inflation was ramping up a couple of years ago. But the company's results speak for themselves -- indicating P&G has impeccable pricing power. P&G's biggest advantage is attracting and retaining customers at different price points. For example, it owns Tide, Downy, Gain, and Bounce -- which have varying product offerings and price points. If customers pull back on spending, they may switch from Tide to Gain, but that doesn't mean P&G will lose the customer altogether.

By comparison, if a consumer chooses to shop at Walmart instead of Target, Target loses out completely. P&G's brands work together and protect the company from industry challenges even during economic downturns. This diversification and consistency makes P&G such a reliable dividend stock, no matter what the economy is doing.

The P&G premium

Aside from its stagnating sales growth, the biggest red flag for buying P&G stock now is its valuation.

P&G's price-to-earnings ratio is 26.6 -- which is high for a stodgy consumer staples company. But as mentioned, P&G is no ordinary dividend stock. It is a Dow component with 68 consecutive years of dividend increases.

The problem is that investors must pay a premium price for P&G's quality. But at least its historical valuation indicates this has been the case for a while now, as P&G's 10-year median P/E is 25.3. There are plenty of less expensive options than P&G, including Coke. Still, the fact that P&G has long sported a premium valuation should help investors understand that the stock isn't necessarily overpriced.

The perfect safe dividend stock

P&G's sales volume stagnated in its recent quarter (third-quarter fiscal year 2024). The company's guidance suggests 2% to 4% revenue growth for the full fiscal year, over $9 billion in dividends, and $5 billion to $6 billion in buybacks.

Investors should expect P&G to return to mid-single-digit sales growth in fiscal 2025 while retaining its high margins. Still, the company continues to deliver for shareholders in its capital return program.

P&G is the perfect dividend stock for risk-averse investors who aren't trying to outperform the S&P 500, but want to preserve capital and collect a steady stream of passive income from a company that can put up solid results even during a recession.

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