Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Procter and Gamble's Dividend Holds Up as Oil Prices Surge
Transcript
- Lucas: Alright, let's talk about a company that's been raising its dividend for 68 consecutive years — Procter & Gamble. That streak puts it squarely in the Dividend King club. But right now, P&G is dealing with two big headwinds: oil prices ripping higher and the 10-year Treasury yield sitting at 4.71 percent. Luna: That's a nasty combo. Higher oil means higher input costs for packaging and shipping, and a 4.71 percent bond yield makes P&G's dividend yield of around two point four percent look less compelling. Lucas: Exactly. So the question is: can P&G keep growing its dividend at a reasonable pace, or is the streak at risk? Let's start with the oil piece. P&G buys a lot of plastic resin derived from oil, plus it spends heavily on transportation. Every dollar higher per barrel of crude pressures their gross margin. But here's the thing — P&G has pricing power. They've been raising prices on Tide and Pampers consistently. Luna: Right, they can pass costs through. But there's a lag. And in the meantime, free cash flow takes a hit. That's the metric that really matters for the dividend. Lucas: Exactly. In their last fiscal year, P&G generated about 17 billion dollars in free cash flow and paid out about nine billion in dividends. That's a payout ratio on free cash flow of roughly 53 percent — well within the safe zone. And they've got a fortress balance sheet with an AA- credit rating. Luna: So the dividend is safe for now. But the bigger issue might be on the demand side — are consumers trading down to cheaper brands as inflation bites? P&G's premium products like Tide Pods are discretionary-ish. Lucas: That's the risk. When oil drives inflation higher, the Fed might hike rates. Odds of a hike just surged this week because of oil. Higher rates slow the economy, and that could hit volume for consumer staples. But P&G has navigated rate cycles before. During the 2022-2023 tightening, they still grew earnings per share. Luna: Still, the bond market is screaming 'give me 4.7 percent with zero risk' while P&G offers less than half that yield with equity risk. That's a tough sell for income investors. Lucas: It is. But you're not buying P&G for the current yield — you're buying it for the dividend growth. Over the last decade, P&G grew its dividend at about 5 percent compound annual growth rate. That means in ten years, your yield on cost could be well over 4 percent. Meanwhile, that bond pays the same coupon forever. Luna: True, but only if P&G keeps growing the dividend. If oil and rates stay high, growth could slow. Their last increase was 3 percent, which is below their historical average. Lucas: Fair point. But even a 3 percent raise plus a 2.4 percent starting yield gives you a total return of over 5 percent annually just from income and growth — without counting stock appreciation. And that's before you factor in the compounding of reinvested dividends. Luna: So your argument is that dividend quality matters more than current yield, especially when bonds are tempting you with high rates. Lucas: Right. For a long-term income portfolio, you want companies with the ability to keep raising dividends through different economic environments. P&G has done it through wars, recessions, and high inflation. The current environment is a test, but they pass the free cash flow test. Luna: Speaking of long-term investing — this show stays ad-free, and that's a choice. If these money conversations have helped you think about a decision differently, the best way to support it is buy me a coffee dot com slash fexingo. Lucas: Yeah, we keep it independent because we think that's the right call. No sponsors nudging the content. So if you find value in it, that link is there. And honestly, it's a small gesture that lets us keep doing exactly what we're doing. Luna: Absolutely. Back to P&G: what's the one thing you'd tell an investor to watch next quarter? Lucas: Watch the free cash flow conversion rate. If it drops below 80 percent of net income, that's a yellow flag. Also, keep an eye on the payout ratio — if it creeps above 65 percent on free cash flow, the dividend growth rate might slow further. Luna: So the dividend is safe for now, but the growth trajectory depends on oil and consumer spending. Lucas: Exactly. P&G is still a buy for dividend growth investors, but you have to have a 10-year time horizon. If you need income today, bonds are the better bet. If you want your income to grow, P&G is a quality pick at a reasonable valuation. Luna: And that's the key distinction that a lot of investors miss. Current yield versus total return on dividends. Lucas: Right. And with the S&P 500 at 7,412 and the Dow above 51,000, the market is pricing in a lot of optimism. But defensive stocks like P&G give you a buffer. They may not shoot the lights out, but they keep compounding. Luna: Alright, next time we'll look at another sector that's benefiting from the oil surge — energy dividends. Thanks for listening. Lucas: Take care, and keep your dividends growing.