Why P&G is a Great Stock for Retirement

For those considering retirement soon, Procter & Gamble (NYSE:PG) might be a good fit for a portfolio. It’s stable outlook given its personal care focus, its history of creating new products to meet consumers’ needs, the near 50% dividend payout and strong cash flow make it a compelling choice for those looking to buy and hold quality stocks.

P&G is the market leader in the very competitive personal and home care industry that includes players like Unilever (NYSE:UL), Colgate-Palmolive (NYSE:CL) and Kimberly-Clark (NYSE:KMB). We value P&G with a $75.25 Trefis price estimate of its stock, at roughly 15% premium to its current market price.

Stable Outlook

Necessities are here to stay. New technologies can become obsolete and luxuries goods often swing widely with economic cycles. However the consumer demand for necessities like washing detergent, shampoo, razors and skin crèmes often holds up when households forfeit discretionary spending.

P&G’s well-diversified business with less than 40% sales coming from North America and 35% from developing markets in Asia and Latin America further helps cushion any business or economic shocks from any particular region, which lends it some added stability.

All of this was reflected in P&G’s stock price that remained relatively stable during the economic downturn from 2007-08. In the past year, P&G’s stock has increased steadily by about 10% to current levels of around $65.

Innovation Provides Growth

P&G frequently ranks high as one of the most innovative and admired companies in the U.S. according to number studies like CNN Money’s annual ranking. ^[1] With R&D spending at around $2 billion ^[2] in the last fiscal year ending June 2010, P&G products have been around for over 170 years backed by innovation, which shall help it maintain and even grow its market share in the future as well.

P&G bests its peers with a 14% cash conversion ratio, which captures the company’s operational efficiencies. This is mostly driven by economies of scale and shows how efficiently the company converts sales to cash. This in turn helps P&G maintain a healthy dividend payout ratio, which is around 48% of the cash it generates. We wrote a note titled Procter & Gamble’s Cash Flow Bests Peers, Justifies 20% Upside discussing this.

For retirees, the dividend constitutes a regular income stream, and P&G boasts 55 consecutive years of increasing dividends at a average annual growth rate of over 9% ^[3]

This kind of cash flow and earnings profile is why P&G can count Warren Buffett as one of its shareholders as Berkshire Hathaway owns over 3% of the company. ^[4]

You can see a detailed analysis of our $75.25 Trefis price estimate of Procter& Gamble’s stock here.

1. World’s Most Admired Companies, CNNMoney online, May 2011 [↩]
2. Tough Times Spur Shifts in Corporate R&D Spending, Bloomberg Businessweek, August 9’ 2010 [↩]
3. P&G Increases Dividend by 9%, CNBC, April 11’ 2011 [↩]
4. Warren Buffett’s Berkshire Slashes Oil, P&G, J&J Stakes, CNBC, February 16’ 2010 [↩]