Wednesday, April 15, 2009

Procter and Gamble -- Dividends Talk

Procter and Gamble announced late Tuesday that they were hiking their dividend by 10%. This increase was nearly twice what many analysts were estimating and offers important clues about PG's view of the current economy. Here's the reason: Dividends have been under attack over the last year as a result of the weak economy, but also because of many companies' need to conserve capital. For these reasons and others, the notion has developed that even companies with plenty of free cash flow like PG would use this opportunity to set their dividend growth rates on a lower track. PG's 10% dividend hike blows that idea away. Indeed, it is a message that I believe will be corroborated by many more companies. Companies that are committed to a dividend aren't going to change their ways very much. They will only do so if it is a matter of sound business practices or survival. PG could have raised their dividend by anything between 5% and 7% and most people would have been happy. In my judgment, by hiking the dividend 10%, PG is making a statement about their view of the unfolding economic landscape. In short, they believe the world hasn't changed as much as the headlines might suggest. They must believe their worldwide business is still on a double digit growth track, and that people won't abandon brand name products for cheaper private label offerings. Dividends are the most tangible link between a company and its long-term shareholders. We are going through a very difficult time in some industries, but wise companies will think twice before tampering too much with this link to their most patient and dedicated owners. Thank you Procter and Gamble for showing us your stuff.

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