Proctor & Gamble (PG) Just Announced a Token Dividend Increase
Proctor & Gamble (PG) just recently announced a very slight increase in its annual dividend to shareholders. Based on some of the shareholders comments from around the web, I get the impression that just as many people are displeased with the small increase as there are those that are satisfied with any increase at all. With that in mind, I thought it would be a good idea to take a closer look at P&G's dividend growth rate through the "Divi-X" system.
Coincidentally, the end of March has given us six years of trading history data with P&G using the "Divi-X" System, as it is one of the securities belonging to the "Divi-X" Index, so this article also gets filed under "Divi-X" Annual Review.' Before we dig a little deeper into the dividend situation, let's quickly recap our last six years with (PG).
On April 10th, 2010, this is what your 'Leverage Projection Worksheet' would have looked like:
Based on its 'then' dividend yield of 3.10%, we opted for our usual "Multiplier Pick" of 80 which leveraged us at a modest 20.67%.
We'll discuss Year Six's results in a minute, but for now, here were the first five:
After five years, "Divi-X" did hold a +5% return advantage over an all cash investment ("Divi-X" 52.66% less 'Without "Divi-x" 48.51% = 5.15%). That five percent advantage was thanks to the 15.93% return "Divi-X" earned on the 20.67% leveraged when we purchased our shares. Personally, I would like to see the leveraged returns higher than this, but at the time, (PG) had been a couple months into its recent decline that began after its peak in December of 2014 and bottomed in August of 2015. Since then, (PG) has been clawing its way back as it currently sits up over ten percent from its August bottom, which brings us to Year 6.
If you are reading this article and scratching your head, it's because you haven't learned our very simple system.
A few things to note about this chart:
- After nearly five and a half years, (PG) gave "Divi-X" its first real test. Despite nearly a 27% decline in share price, "Divi-X" only dipped fourteen dollars below just an all cash investment (‘Without “Divi-X”) and as you can see in the big circle to the right, "Divi-X" passed that test with flying colors, as just seven short months later; “Divi-X” once again took its place back in the lead with a plus $220.40.
- Despite (PG)'s valiant effort to claw its way back, it obviously has a long way to go. Our 'Expected Return' at this point has our "Divi-X" value at $9,202.53, which currently (end of March) has it only at $7,840.64, a $1,361.89 shortfall.
- In light of (PG)'s short-term woes, which may continue as evidenced by the uninspired dividend increase just announced, "Divi-X" is still pulling its weight, giving us a decent 4.7% edge over 'Without "Divi-X".
Now on to the Dividend Picture
The most common complaint I witnessed by shareholders was that the dividend increase only represented a 1% hike. To me, such a small increase gives me pause as to the company's short-term prospects but to many, it seemed like a hit to shareholders' rising cost of living, which I totally get. Social Security recipients didn't get any cost of living increase this year, so the one percent dividend increase may have added salt for many relying on dividend income.
- The first thing I would like to point out is that the "Divi-X" yield is 'not' surpassing the 'All Cash Yield' (Without "Divi-X"). I put emphasis on this in my book. In the beginning, you will sacrifice short-term yield for long-term appreciation. But as you can clearly see from the two linear trajectories in the chart above, the yield on your cash investment is growing at a much faster rate with "Divi-X" than 'Without.' After six years, if you are not seeing long-term appreciation and your "Divi-X" yield is still lower than 'Without,' you would seriously have to consider why you're still holding.
- The small 1% dividend increase just announced by (PG) only contributes an additional 0.12% yield to your cash investment 'Without "Divi-X" but it contributes an additional 0.25% yield to your "Divi-X" cash investment. That's more than double the yield growth!
- If you haven't read my book, I want to explain more about the chart above. The 'Proj Divi-X Yield' is based on an assumption tied to your 'Expected Return.' It will fluctuate based on "actual" dividends paid by the company. The 'All Cash Yield' is the actual yield paid on a stock by the company based on an all cash investment ('Without"Divi-X"). That will only change when the company announces a dividend increase or decrease. The 'Divi-X Yield' assumes no future dividend increases, just as the 'All Cash Yield' does...but it continues to increase, year after year, after year! If (PG) never raised their dividend again, the 'Divi-X Yield' would surpass the 'All Cash Yield' by 2019 and the yield spread would widen more and more, year after year, after year! That spread widens considerably more when the company does raise the dividend and that spread remains in the event that the company cuts (not eliminate) the dividend!
Over the last few years, Proctor & Gamble has shown itself to be a very slow growth security. If I had invested in this security personally, I would be giving serious consideration about whether to continue to hold or not. Not because it's a bad company but because the "Divi-X" system has performed so much better for many other companies, many which are in the "Divi-X" Index. I do maintain it due to the fact that it is in the "Divi-X" Index because, as mentioned in my book, I did not cherry pick stocks just to make my system look "pie in the sky" fantastic. That being said, I certainly understand why many continue to hold and best of luck to you all. As always, many happy returns.
Authored by Lee Carroll Wentker
All screen captures are taken from 'The "Divi-X" System Workbook'
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