A look back at Procter & Gamble

A year on, how has this Dividend King played out?

It’s almost been a year since I wrote my first in depth dive on Procter & Gamble PG 0.00, and it’s now time for me to review the company to see if my thesis has been playing out, or if anything major has happened to the company that might have impacted its long term prospects.

If you’ll recall, at the time of my review PG 0.00 was trading at $140, well above my valuation, and therefore I gave it a “HOLD” rating, where I would keep my existing shares but not invest any more.

You can find my initial review of the company here (Part 2 and Part 3).

The Thesis

Let’s take a look back at what I wrote a year ago to see what I thought about the company, and what the thesis for it would be:

• The companies business is stable, non-cyclical and simple to understand

• The company prioritizes shareholder returns

• There is little risk of bankruptcy

• There is little regulatory oversight that is directed straight at them.

• The company is overvalued, but not extremely so.

How has this held up?

Let’s take it point by point:

• The companies business is stable, non-cyclical and simple to understand

Well, they haven’t changed business models yet!

The companies business has carried on as usual, with a slight increase in revenues and earnings, and with profit margins remaining more or less the same.

At the time I said:

I don’t have to go to sleep at night worrying if Procter & Gamble is going to go belly up, nor do I have to worry about some new entrant coming in and making their business obsolete.

And it’s true. I haven’t worried about PG 0.00 throughout the past year.

• The company prioritizes shareholder returns

Well, this Dividend Aristocrat has done it again, and raised its dividend in the second quarter, right on schedule.

At the same time, the business spent about 10 billion in net stock buybacks (more than they spent on dividends!), which is… not great.

Don’t get me wrong, I like share buybacks, but spending about as much as what they are spending on their dividends buying back shares at prices that I classify as “overvalued” is not my idea of a good time.

A+ for the sentiment, C- for the execution.

They should just raise the dividend more, or pay out a special dividend, instead of buying back this company at a 20+ PE.

• There is little risk of bankruptcy

Well, I don’t think the company is at risk of bankruptcy.

I would have liked it if they would have paid off some of their long term debt, but ultimately they can still pay it off in less than 2 years if they really put their minds to it.

To be perfectly honest, I would say that instead of spending 10 billion on buybacks, the company had paid off half of their long term debt, we as investors would be better off.

Still, whats done is done, and ultimately the amounts of debt, and the income and assets available to the company are such that I’m not worried the company will go bust.

• There is little regulatory oversight that is directed straight at them.

Surprisingly enough almost immediately after I published this the company got hit with a wave of lawsuits regarding the safety of their products!

Ultimately I don’t think these will amount to much though, and I still don’t expect any meaningful regulatory scrutiny to come from it.

• The company is overvalued, but not extremely so.

Well, the company has been on a bit of a rollercoaster, particularly given the massive bear market we’ve seen!

Surprisingly enough, despite me thinking it was overvalued the business is still trading at the same values it was trading a year ago, and has beaten the market!

When you account for the dividends I received in the meantime, I’m actually up!

The future

Overall my thesis hasn’t changed at all, nor has my valuation.

I’m happy with the way the company has performed over the past year, and it will remain in my portfolio until something meaningfully changes.

Once again, I don’t think that the company is undervalued enough to justify buying more though, so I will maintain my current holdings, which currently make up about 1.5% of my portfolio.

My Stance: HOLD

What about you? Do you own PG 0.00 ? Where does it fit in your portfolio?