Earlier this week, due to sharp increases in energy and gasoline prices (up 5.6% and 10.6% month-on-month respectively), August CPI fell short of expectations, rising 3.7% year-on-year.
Energy prices rise and housing inflation persists Although real-time housing data shows no inflation, year-on-year growth of 7.3% is expected, which should help the CPI decisively break the downward trend since October 2022.
If you’ve been following my research, you know that I’m currently bullish on a number of companies, and my base case calls for lower interest rates soon.
But that doesn’t mean my entire portfolio is in a position of declining interest rates. That would be foolish and dangerous.
Earlier this week I published an article called 3 REITs Taller, longer scenes I think investors should position themselves for a variety of potential macroeconomic scenarios, including higher levels in the longer-term scenario. I also gave the example of three REITs, which despite popular belief are actually well-positioned with high interest rates and should outperform the market in this scenario.
In an effort to diversify and protect my portfolio from the risk of sticky inflation and high interest rates in the coming years, I did a lot of research outside of my usual investments of REITs, financials, and energy.
I primarily look for defensive dividend stocks with non-cyclical demand, low leverage, and a strong ability to pass inflation on to consumers. I find that consumer staples companies, as well as some consumer discretionary companies such as fast food restaurants, fit this criteria fairly well.
My thinking is that rather than holding a 10-15% cash position in anticipation of a market crash, I could buy defensive stocks today with dividend yields around 3% and “lock in” expected annual total returns in the range of 7-10 between %.
If we get a soft landing, then these stocks will indeed perform better than cash, and if inflation remains high, the Fed pushes the economy into recession, and the market sells off, then these stocks with a beta of 0.5-0.6x will continue to rise. Definitely less decline than the riskier tech stocks, which I can then move towards investing in in hopes of getting a higher total return than 7-10%.
That’s why I plan to start a series of articles on defensive companies, from The Coca-Cola Company (KO) to McDonald’s Corporation (MCD) and Starbucks Corporation (SBUX), Procter (NYSE:PG) I’ll start with this today.
Procter & Gamble is a global AA-rated consumer staples giant that needs no introduction as it owns some of the most recognized brands in beauty, grooming, home care and healthcare such as Gillette, Old Spice, Oral-B, Pampers wait. .
I guarantee that you have at least a dozen products produced by PG at home. The important thing is that these are indispensable products in our daily lives.That means we’re going to buy them anyway, which makes the companies that make them huge pricing powerwhich is especially important during periods of high inflation.
The latest results from PG’s reported fourth-quarter 2023 earnings confirm that the company is indeed able to pass inflation on to consumers. Organic growth was 7%, with 9% attributed to pricing and 1% to mix, while volumes declined 3%. Notably, the growth was broad-based, touching all segments of PG.
Core earnings came to $5.90 per share, up just 2% from the year-earlier period, due to strong headwinds from higher material costs and foreign exchange ($1.38 per share). Holding currency constant, core earnings per share grew an impressive 11% year over year.
Due to the strong results, the company raised its dividend by 3% to $0.941 per quarter, giving the dividend a yield of 2.4%. In addition to paying $9 billion in dividends, the company also executed $7.4 billion in share repurchases, confirming its shareholder-friendly capital policy, as evidenced by 66 consecutive years of dividend increases.
Looking ahead, management expects price increases to slow and sales to return to near-normal levels, which should result in market growth of approximately 4% going forward. This assumption, along with management’s expectation to gradually capture global market share, leads to organic sales guidance of 4-5% for fiscal 2024.
On the earnings front, guidance calls for fiscal 2024 earnings per share of $6.25-$6.43, with the midpoint implying annual growth of 7.5%. This still assumes 3% headwinds from FX, so guidance calls for 9-12% year-over-year EPS growth on a neutral currency basis.
An additional $9 billion in dividends and $5-6 billion in share repurchases are expected through 2024, with core EPS growth beating consensus at 6-8% through fiscal 2026.
Procter & Gamble is a Dividend King, which means it pays one of the most reliable dividends, currently yielding 2.4%.
Quality this high rarely comes cheap, and today is no exception. The stock trades at a 2023 P/E ratio of 25.8 times and a forward P/E ratio of 24.4 times, trading above its 10-year average P/E ratio of 23.8 times.
So we’re paying about an 8% premium today relative to historical valuations.
Having said that, I think we can reasonably expect the following:
- The 2.4% dividend virtually guarantees growth of 2-4% per year
- Core earnings per share growth of 6-8% over the next three years
- Re-rating to 23.8x P/E ratio of 8% may bring downside risks
Taken together, the price target after three years is $175, equivalent to The expected annual return is approximately 6.5%.
That’s slightly below the 7-10% total return I’m aiming for as part of my strategy, and below the average market return. Therefore, I rate PG at $155 per share and will continue to look for other defensive companies with higher potential upside.