Procter & Gamble (NYSE:PG) will announce its earnings next Tuesday before the opening bell. Despite the venerable personal-care products maker’s reputation as a defensive dividend payer, PG stock has rallied massively over the last year.
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Unfortunately, the rally may have left new investors with less incentive to buy PG stock. With the multiples of PG stock having risen to multi-year highs and its profit growth remaining moderate at best, investors should probably think twice about buying Procter and Gamble at these levels.
For PG’s fiscal third quarter, analysts’ consensus earnings per share estimate is $1.03. That’s 3% higher than Q3 of 2018 when the company earned $1 per share of PG stock. Analysts on average predict revenues of $16.32 billion, a slight gain from the $16.28 billion the company generated during last year’s Q3.
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On the surface, PG appears to be performing well. Trading near its all-time highs, PG stock is 50% above its levels of one year ago. That seems unusual for a stock that traders tend to buy for its dividend.
After the company raised the dividend of PG stock this year, the payout has risen for 63 straight years, the fourth-longest streak on Wall Street. PG has paid a dividend every year since 1890. Currently at $2.87 per share, the payout yields 2.75%.
The impressive rally of PG stock has made it less appealing. The dividend yield of PG stock was about 3.5% this time last year, versus 2.75% now. Moreover, PG’s price-earnings (PE) ratio has risen to 25.74. In fairness, Procter & Gamble’s peers such as Colgate-Palmolive (NYSE:CL), Kimberly Clark (NYSE:KMB), and Clorox (NYSE:CLX) trade at comparable or higher multiples.
Still, the current PE ratio of PG is above its average PE over the last five years of 23.5. It’s also well above the mid-teen multiples Procter & Gamble was awarded in the early part of the decade. Also, Wall Street expects PG to report solid, but unimpressive, profit increases. On average, analysts forecast 5.2% profit growth for this fiscal year and 7% next year. Those increases appear too low to justify the current PE ratio of PG stock.
Furthermore, even after spinning off numerous brands in the middle part of the decade, PG stock remains vulnerable. For all of its accolades, the competitive moat of Procter and Gamble begins and ends with brand recognition and store-shelf space. Consumers know and love PG’s brands such as Tide laundry detergent and Bounty paper towels. However, thanks to e-commerce, consumers can more easily find comparable products at lower prices.
I do not think the increased competition will wipe out PG stock. I also do not believe that the rising dividend of PG stock will be threatened. Still, the company may have difficulty growing its revenue, making PG’s current valuation difficult to justify. Going into earnings, few investors have an incentive to buy Procter and Gamble at these levels.
Given the recent increases in its price, PG stock will probably struggle to move higher in the near-term. As a result, I see no reason to buy PG ‘s shares ahead of its earnings.
Procter and Gamble enjoyed an unexpected but impressive run over the last year. However, consumer defensive stocks better known for paying dividends rarely have such rallies. Despite increasing competition and analysts’ belief that the company’s revenue growth was anemic last quarter, I think the stock’s dividend will continue to rise. However, other stocks feature annual dividend hikes and lower valuations.
For now, income-oriented investors will probably find higher overall returns elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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