Thursday, March 13, 2008

Proctor and Gamble: Defensive, Global, Growth

There are few stocks that qualify as defensive global growth stocks (GGS). Colgate, Pepsico, Coke, and Nestle would also qualify on my short list. A GGS in my estimation must possess three qualities: 1. Their business is not subject to interest rates or economic cycles; 2. The majority of their business is not centered in any one country; and 3. They must have double digit earnings and dividend growth.

I believe one of the companies that best fulfils these criteria is Procter and Gamble. PG has a wide array of products that we use everyday, whether there is a subprime crisis or not. From Crest toothpaste, to Tide, to Oil of Olay, they are in the cupboards that all of us visit everyday

Their dividend has been the picture of consistency. Over the last 20 years, PG's dividend has grown at 11.0%. Their 10 year growth average is 10.7%, and last year they increased their dividend 12.5.

Even though the stock has bucked the subprime headwinds and produced a 10% total return over the last 12 months, I believe they have more room to go because of the geographic mix of their business. Nearly two-thirds of their revenues and earnings come from outside the US. Nearly half of their global business comes from developing nations, which are growing much faster than the US or Europe.

Remarkably, they have raised their dividend for over 50 consecutive years, the longest running streak of any American company.

Our Dividend Valuation Model (Click to enlarge) has been a good fit with the actual annual movement of PG, except the late 90s. The stripped black "value bar" to the far right on the chart is our model's best guess of what we might expect from PG in the year ahead. If it were to attain that level, it would be more than a 15% gain. The Valuation is based on the historical relationship among PG's price, dividend, and changes in interest rates. The past in no guarantee of the future, it is only our best guess.

The last 12 months have not seen many winning stocks. PG has been one, and the odds are very good it can do it again if they can sustain their enviable long-term trends of earnings and dividend growth.

You guessed it. Everyone I know owns the stock. Please see disclaimer link