Monday, April 11, 2016

Dividend Growth Investing at Work - 60 Years of Dividend Growth for this Consumer Giant


Something I love about dividend growth investing is that each month I get to hear about companies I own deciding to pay me more money in dividends.  Just for owning a small portion of said companies.  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  That's dividend growth investing at work!  I mean who doesn't like getting a raise for doing nothing?

On Friday of last week the Board of Directors at Procter & Gamble (PG) announced an increase to their quarterly dividend.  The new dividend payout is $0.6695 which is a 1.0% increase from the previous rate of $0.6629.  Procter & Gamble has now increased dividends for 60 consecutive years which is an amazing feat that places them firmly as a Dividend Champion.  Shares currently offer a 3.22% yield.

I own 68.412 shares of Procter & Gamble in my FI Portfolio so this raise grew my forward 12-month dividends by $1.81.  This is the 5th dividend increase I've received from Procter & Gamble since initiating a position in 2011.  In total my dividend payments on the original shares have increased by 27.5% from raises alone.  According to USInflationCalculator the total inflation for that same time period sits at 5.4% so I'm more than happy with Procter & Gamble's ability to increase my purchasing power.

Dividend growth has historically been pretty strong but the last two years have left a lot to be desired.  As you can see in the table below dividend growth was routinely in the high single to low double digits rates; however, a 1% increase for this year is a bit uninspiring.  Earnings have never recovered since reaching a high of $4.26 for fiscal year 2009.  With Procter & Gamble struggling to grow earnings they've now started selling off non-core assets/brands in hopes of refocusing the company around the core group of brands.  Given everything that's changing with the company I was expecting lower dividend growth in the 3% range, but not quite as low as the 1% increase.


The payout ratio for Procter & Gamble doesn't bode well for future dividend growth until the company can start to grow again.  Based on the TTM earnings of $2.95 the payout ratio based off the new dividend rate would be 90.8%.  Analysts expect Procter & Gamble to show earnings of $3.63 for the current fiscal year.  That's makes the payout ratio much more palatable, but still elevated at 73.8%.  Over the TTM Procter & Gamble generated $12.241 B in free cash flow.  Using the current shares outstanding, 2,865 M, the new dividend payout would represent a 62.7% payout ratio which looks a lot more appealing than the traditional payout ratio.

My forward dividends increased by $1.81 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my portfolio's current yield of 3.03% this raise is like I invested an extra $60 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  That's the beauty of the dividend growth investing strategy because you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

This is the first of my 7 expected increases for April.  So for this year I've received 15 dividend increases adding $69.50 to my forward 12-month dividends.  I'm 0-for-1 on forecasting dividend growth but a raise is a raise so I can't complain.

My FI Portfolio's forward-12 month dividends are up to $5,505.07 and including my Loyal3 portfolio's forward dividends of $62.98 brings my total taxable account forward dividends to $5,568.05.

Do you own Procter & Gamble?  Are you concerned with the high payout ratio and low dividend growth?

Image courtesy of digitalart on FreeDigitalPhotos.net.

4 comments:

  1. Congrats on the raise for doing nothing except investing smartly. I don't think I have heard of this crossover point you speak of, but it makes perfect sense. I have quite a few years to get to that point but it's a fun goal to set!

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  2. According to Dividend Growth Investor and the company's press release, PG has 60 years of dividend growth

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  3. I really like the way you think about dividend increases. PG's earnings should grow faster over the next 5 years than the stagnation of the previous 5 due to the better focus. The payout ratio is high, so I wouldn't be surprised if dividends grew slower than EPS for several more years at PG.

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  4. I am fairly concerned about P & G. There last few raises seem to be an increase for increase sake. The payout ratio is just getting bigger and bigger.

    As they pay out more of their profit, they are keeping less to invest back into the business, which makes further profits more difficult. I know dividend increases are what DGI investors want, but in the long run it's not in the company's best interest to do so if they aren't growing earnings too. Being an Earnings Growth Investor is as important, if not more important, than just a DGI.

    Tristan

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