Procter & Gamble (PG): Double the Dividend? No Problem!

The world's leading branded consumer products company Proctor & Gamble (PG) generates so much money that it could afford to double the dividend without much sweat.

After yesterday’s incredible 1000 point drop in the Dow, several companies traded over 30% above and/or below their market price. We’re not talking small fry here either. Consumer goods empire Procter & Gamble (PG) saw its stock briefly fall to $40, before making a rapid return to the current price around $60.
 
Despite the rapid up/down movement, which took place over a period not longer than twenty minutes, Procter & Gamble (PG) is one of the stalwarts of American business and one of it’s best and most reliable dividend payers.
 
The Procter & Gamble Company (PG) is focused on providing branded consumer packaged goods. The Company's products are sold in over 180 countries worldwide primarily through mass merchandisers, grocery stores, membership club stores, and drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets. As of early 2010, P&G is the 14th most profitable corporation in the world, and the 8th largest corporation in the United States by market capitalization ($175 billion). At last count, the company had 27 “billion dollar” brands – or brands that generated over $1 billion per year each; the best-know include Duracell, Gillette, Olay, Oral-B, Pampers, Pantene, Prilosec OTC, Pringles and Tide.
 
The company started paying dividends in 1970 and since then has paid dividends every quarter. The latest payment of $0.482 is 46 times larger than the equivalent dividend 40 years ago.
 
Financial speaking Procter & Gamble (PG) is sound. The firm has over $4 billion in cash on the balance sheet. Total debt to capital is at 30%, which is low compared to rivals, while interest coverage is at 17 times. The company generated a very impressive 18% return on equity and 11% return on invested capital. Interestingly, revenue per employee is $595,000, which is 21% higher than the industry average (and demonstrates the company’s management prowess and effectiveness). Price to sales is 2.18 and price to book is 2.69 (as compared to the industry average of over 6 times – how are other company’s brands worth more than P&G’s?).
 
The lifeblood of any business is cash, and Procter & Gamble (PG) generated $14 billion of it on 2009. If you add up all the cash the company has generated from operations and subtract what it has spent on capital expenditure and dividends, you come out with an average surplus cash pile of $5 billion per year. This is the real value of Proctor & Gamble (PG). In 2009 total dividends paid out were around $4.5 billion which means if the excess is $5 billion, P&G could have paid out the same dividend twice without any major effect on the business.
 
Dividends for the second quarter of 2010 were up 9.5% on the previous quarter and are likely to end the year up by a similar percentage. At $60, the dividend yield is 3.2%.
 
Everybody understands the products Procter & Gamble (PG) sells, and most of us use at least one of them every single day. The company has a presence in almost every American home – perhaps it should have a presence in your income portfolio too?
 
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