Monday, 26 October 2015

BUY: Procter & Gamble (PG)--A Small Bite of a Consumer Giant

This was composed of two small purchases made in late September and early October.

Price: $71.31
Shares: 5
Predicted annual dividend income: $13.25 (£7.50 minus withholding tax)

My direct holdings in US-listed companies is pretty thin on the ground. In fact, it amounts to one holding: XL Group. What is more, that joined my portfolio as part of the Catlin acquisition back in May.

Nonetheless, I have always been interested in opening a few small positions in some American giants. Indeed, I hope to set a target at some point of having certain amount of my portfolio in non-UK equities of which the US will form a large part.

So why have I not already built up my US exposure? Chiefly this was because I had yet to find an economical means by which to do it. Elsewhere I discussed the possibility of opening a US brokerage. However, that faces various difficulties.

But recently, a fairly well-established European broker has landed on the shores of Britain. With them they brought incredibly cheap trading charges for the US market. I am still experimenting with them at present and will write about it in more detail later.

So who did I buy? Well, I went with the consumer giant and Dividend Aristocrat: Procter & Gamble.

Why Procter & Gamble?

For most of you P&G hardly need an introduction. In my house I can easily pick out a number of their brands. 

My kitchen rarely finds itself without Fairy washing up liquid proudly standing by the sink (occasionally Morning Fresh or Persil owned by other holdings PZ Cussons and Unilever find their way there, it must be said). By my washing machine, Lenor conditioner sits quietly (again, juggling places with the Unilever Comfort brand). 

In the bathroom, P&G brands abound to such an extent it could almost be called the P&G Room. Pantene, Gillette, Aussie, Oral-B, Braun and many more are found peppered around the place.

I doubt it would take you more than a few minutes to find a handful of P&G products in your home either. The appeal of the company is therefore obvious. If you should invest in what you know, I certainly know P&G.

At the moment, the company is going through a pretty dramatic transformation. It is looking to become leaner. Long-term this is a very attractive decision. However, in the short-term we are seeing some earnings pain. 

This is one of the reasons that we find the share price hovering around the low $70 range at the moment. Prior to the recent drop, the last time we saw prices at this level was January 2013--nearly 3 years ago.

Good Value?

The average PE ratio figure for P&G since is just over 21. To be expected from a consumer staple.

Now for this year coming they are expected to see an earnings per share (EPS) decline--according to consensus analyst predictions--of about 5%. This would leave things looking like this:

EPSP/E Ratio
Difference (%)10.92

However, for next year they expect growth to return to the company with a consensus prediction of about 13%. Not bad at all. As a consequence, for that year the figures look like this:

EPSP/E Ratio
Difference (%)13.51

Overall, for me, this looks very good value indeed for a high-quality, consumer defensive company like P&G. Indeed, it was around this price that I first bought into Unilever.

Good Dividend

As mentioned at the start here. P&G are famously not only one of the Dividend Aristocrats but one of the Dividend Kings. In other words, not only have a 25+ year dividend growth history but a 50+ year growth history. Needless to say, that is mightily impressive.

The recent share price drops also means that the yield looks pretty good as well. Analysts predict dividends of $2.68 and $2.88 for this year and next. This would throw out a yield of 3.76% and 4.04% respectively.

Cover has grown a little thin in recent years. Back in 2011, the dividend was covered over 2 times by earnings. This year coming it is expected to be about 1.42 times covered. Nonetheless, the anticipated sharp growth the year after sees this jump up to 1.5 times.

With a company like P&G, though, it is cash flow cover which impresses. Their prodigious cash generation means the dividend is very comfortably covered in real terms.

Other Numbers

P&G also looks very health in other regards. Its debt to equity level is 0.49. That is pretty good. The debt levels have also been shrinking (although modestly) since 2011.

It also has about $2.53 in cash per share. This is about 3.54% of the share price. 

P&G and My Investment Goals

So how does my P&G purchase sit within my investment goals for the year? Pretty nicely, actually.

Clearly, being such a small purchase it is hardly going to move the needle much with regards to dividend income. Nonetheless, this calendar year I should see £1.90 or so drop into my brokerage account. Not to be sniffed at at.

Being such a giant in such a defensive industry, it is not surprising to find the company comes with a low Beta volatility value. At just 0.5 it should hopefully make a nice contribution to me achieving a portfolio beta of 0.8 or less.

Also, thanks to the very cheap brokerage fees on the purchase the transaction charges amounted to just 0.42% of the total cost. Consequently it should help me keep my total charges for the year below 1.3%.

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[Creative Commons image reproduced from flickr user Mike Mozart]


  1. Hey DD
    Good luck with this solid buy - that's my hair conditioner you've pictured! :-)

    1. Thanks, weenie.

      I had not actually encountered that particular Pantene scent. Miss DD uses Pantene quite often, but usually a different one.

      Yes, I think it is a very solid buy long-term. I suspect I will get further opportunities in the short-term to top up at similar prices. The recent results were pretty solid. However, the future is still yet to be laid out clearly I think!

  2. Ciao DD

    For what is worth they are part of my portfolio since the start! Great company and good chances of future growth, wouldn't mind adding more but the price it'd need to be much lower I guess as I did some heavy "down averaging" in August with them...

    1. Thanks, Stalflare!

      I am not surprised at all to hear it was an early addition to your portfolio. Probably the case for many investors. For me, I loaded up with Unilever early on. I would have done the same with P&G if I had an easy and economical way of doing so at the time! Glad that I have finally had the chance to jump on board (and at a good price!).

      I suspect the price will return to the c.$70 level again soon. The current push upwards feels a little too optimistic to me. They were solid results, but more needs to be done and there are some worrying aspects in there!

  3. Good article DD, PG are a solid company and great long term investment. Interested to know which broker you refer to as in similar situation trading from the UK.

    1. Thanks, D&T!

      They certainly are. I have been itching to start building up a position with them for some time. At current prices it was too good to miss!

      Sure, I use DeGiro. They recently opened up in the UK after operating on the continent for some years. So far my experience has been good. There are a few issues with them with regards to how they use your shares (read around for it to decide what you think) but as I will never really have that much money in US investments it makes sense at the moment.

      I will write up an article on DeGiro sometime when I get time!