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P&G: Slow & steady
Apr 9, 2009

In the previous article on the dividend series, we had discussed the application on Wipro of an approach through which one can achieve returns entirely from dividends. In this article, we shall discuss another company, P&G Hygiene and Healthcare and apply the same frame work. P&G Hygiene and Healthcare (PGHH) is a 69% subsidiary of the FMCG major, P&G USA. The two-product company is dominating both segments backed by strong brands, namely ‘Vicks’ in the anti cold segment and ‘Whisper’ in feminine care segment. PGHH's Whisper leads the premium segment with over 40% value market share. Johnson & Johnson is the main competitor and the market leader in volume terms. The parent has two other 100% subsidiaries in India, which have well-known brands in the shampoo (Head & Shoulders, Pantene, Rejoice) and detergents space (Ariel, Tide). The industry (anti-cold) it operates in is highly competitive involving both organised as well as unorganised players.

P&G dividend Vs EPS
*Issued bonus
Source: CMIE

The company had been continuously paying dividends for the fourteen year period between FY95 and FY08. It also maintained a higher dividend payout ratio. The average dividend payout ratio during the period under consideration stood at an outstanding 68%. The company also managed to keep its average RONW during the same period around the impressive 30% mark.

The company’s dividend per share has grown at a CAGR of 12% between the period FY95 and FY08, while its earnings per share grew at a CAGR of 9% during the same period. This reveals the fact that the company has always been generous in rewarding its shareholders. Furthermore, the company has also issued bonus to its shareholders twice during the last decade. This further strengthens our belief in the management of the company. Hence given this long history, we believe that there is very little chance that the company might stop paying dividends to its shareholders in the future.

At current price levels, the dividend yield of PGHH is around 3%. Assuming that the company continues to grow its dividend per share at 12%, the investor would be able to get a 10% return annually on his investment from 11th year onwards. This can be backed by the fact that PGHH has very negligible capital expenditure requirements and its working capital requirements are also very limited. It may be also noted that PGHH currently has around Rs 1.7 bn of cash on its balance sheet. Also, dividends are the only way with which PGHH can repatriate profits to its parent company.

Conclusion:
Despite the low current yield, the company’s strong cash reserves and sustained growth is likely to make PGHH an income source for long term investors. In fact, it is likely to become another dividend tortoise, slowly and steadily racing towards the 10% mark. However, investors should bear in mind that the desired returns can be achieved only if one stays invested in the company with a long term perspective. Also, it is important that management policies and environment in which the company operates remain unchanged.

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