Procter & Gamble: No bargain at current price

Procter & Gamble (PG: 59.871 -0.33%, yld: 3.07%), like Johnson & Johnson (JNJ: 58.748 +0.24%, yld: 3.51%), is another one of those ultra-safe blue-chip dividend-paying stocks that has so far significantly outperformed the market during the recent turmoil when nothing’s seemed safe. It’s a regular on many lists of dividend stock recommendations, for good reason, and I’d love to own it too – at the right price.

Another dividend all-star
There’s nothing not to like about PG’s dividend history. It’s a member of the ever-shrinking list of Dividend Aristocrats – stocks whose dividends have increased for the last 25 consecutive years – and, according to DividendInvestor.com, it’s in fact had 55 years of consecutive dividend increases, with a five-year average dividend growth rate of over 11%.

Assuming roughly the same growth rate going forward, this would mean a doubling of the yield on initial cost after only about seven years. Starting at the current yield of about 3% ($1.60 annual dividend at $55/share) an investment in PG now might be expected to be returning $3.20/share in just seven or eight years – regardless of where the stock price might be trading. That’s not a bad deal at all, but perhaps there’ll be an opportunity to do even better…

Fundamentals: P&G – Pricey and a Gamble?
Looking at PG’s fundamentals, estimates point to a projected five-year annual earnings growth rate of about 10%. Plugging this and the last 12 months earnings into a DCF calculator (using a growth rate conservatively set to level out to 0% after that) yields a fair value for PG of about $49.

This isn’t a great sign, especially if we assume further that the projected five-year growth rate at 10% might be too optimistic and instead use a more conservative 7% or 8%. That drops the fair value into the low to mid $40s – quite a ways below the current $55/share.

A quick check of the fundamental analysis of PG at Ockham Research confirms that the stock appears overvalued at these levels with price/sales and price/cash earnings ratios at above-average levels. However, they do note that the dividend yield at almost 3% is near the highest level in recent history, which they consider a positive. But clearly PG at these levels is no bargain.

Technical picture: PG has room to fall
Just a glance at the long-term (38-year) chart below shows what a market stalwart PG has been over the last 25 years – except for a sharp drop in 2000 the stock has steadily climbed higher. And so far in the current bear market – with the S&P 500 down almost 50% from its 2008 highs – PG is down only about 24%.

This is all well and good, but, as the chart indicates, the stock is currently well above its long-term trendline (currently at about $47). So, just a return to the trendline – a perfectly normal action for any stock even without a bear market – would mean a drop of about 15% from current levels. And a further drop to even the low to mid 30s wouldn’t be surprising or unusual within the context of its long-term uptrend channel.

Additionally, the top graph showing PG’s dividend yield over the last 38 years indicates that while 3% may be high relative to recent history, it was as high as 4% to 5% in the late 80s and early 90s (and much higher before that). A return to these yield levels in the near term would suggest a stock price of $40 and $32, respectively.

Note that the above analysis isn’t a prediction – only an attempt to assess current risks and determine what price level(s) may represent an attractive entry point in the relatively near term (weeks/months).

Bottom line
I’m certainly interested in adding this dividend stalwart to my portfolio, but not at current price levels (~$55/share). I’ll start to become interested at about $45/share but would prefer to buy below $40 if given the opportunity.