This Unstoppable Dividend King Could Help Provide Passive Income for a Lifetime

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In today’s uncertain market, there’s a lot of talk about dividend stocks, and for good reason. Dividend stocks can provide a steady income stream without the need to trim a position, which can come in handy during a market sell-off.

Investors who prefer a hands-off approach to managing their portfolios may be in search of the ultimate dividend stock — one that can provide passive income for a lifetime. They should consider Procter & Gamble (NYSE: PG). It isn’t the flashiest name out there, but it has the components that make for a trustworthy dividend stock worth holding forever. Here’s why.

Image source: Getty Images.

A clinic in reliability

At the beginning of the year, I had my concerns about P&G. Growth had slowed, and the company’s net debt was at a 10-year high. P&G relies on earnings and free cash flow (FCF) growth to support expensive share repurchases and dividend payments. And after implementing repeated price hikes, it seemed like P&G was running out of options.

P&G didn’t exactly prove me wrong. After all, growth has slowed, but it’s far from negative. But I did underestimate how simply unstoppable P&G is when it comes to leveraging its powerful brand portfolio. It has seemingly endless pricing power, which is something other consumer staples companies have struggled with as high interest rates continue to squeeze people’s purse strings.

PG Revenue (Annual) data by YCharts

Procter & Gamble finished fiscal 2023 with record diluted earnings per share of $5.90, and record operating income of $18.13 billion. It tied its record revenue from fiscal 2012 of $82 billion, and showed solid cash from operations. P&G had slightly lower sales volume in fourth-quarter fiscal 2023. But incredibly enough, a 7% price increase across the board helped drive 8% organic sales growth.

By now, I would have expected P&G’s pricing power to lose its luster. But that simply hasn’t happened, as customers are absorbing its price hikes. This leaves us with two key takeaways. The first is that P&G has a lot of brand loyalty for a company that sells ordinary beauty, grooming, healthcare, fabric, home care, baby care, feminine care, and family care goods.

The second takeaway is that P&G’s competitors have failed to undercut P&G enough for people to switch over to those brands. Or these companies are dealing with enough inflationary pressures on their own that they don’t have room to cut prices. This leads us to P&G’s ace in the hole — its operating margin.

Margin for error

Bar none, P&G’s secret sauce for returning value to shareholders is its operating margin. P&G finished fiscal 2023 with an operating margin of 22.1%, less than two percentage points away from its all-time high operating margin.

As you can see in the chart below, P&G has done a good job of increasing its operating margin. So although its fiscal 2023 revenue tied the fiscal 2012 record, the company is generating much more operating profit from that revenue than it did 11 years ago.

PG Operating Margin (Annual) data by YCharts

You’ll notice that P&G’s operating margin hasn’t taken a substantial hit relative to its peers. Colgate-Palmolive has a high operating margin, but it has been in decline since the 2017 peak. Unilever‘s operating margin has also been declining steadily, but it wasn’t nearly as high as P&G’s or Colgate’s to begin with.

Meanwhile, you have Kimberly-Clark (the maker of Cottonelle, Scott paper towels, and Huggies), Church & Dwight (maker of Arm & Hammer and OxiClean), Estee Lauder, and Clorox all hovering around 10-year-low operating margins. You may be asking yourself: Do a couple of percentage points of operating margin really make that much of a difference?

The answer is a resounding yes. P&G generated $18.13 billion in operating income in fiscal 2023. Operating income is just the operating margin multiplied by revenue. Based on revenue of $82 billion in fiscal 2023, here’s a look at what P&G’s operating income would have been if it had a different company’s operating margin.

Data source: YCharts.

As you can see in the table, even a few percentage points of operating margin have a big effect. It can mean the difference for billions of dollars of additional buybacks or a meaningful dividend raise. P&G has paid and raised its dividend for 67 consecutive years, making it one of the longest-tenured Dividend Kings. And its high operating margin is a good sign it will be able to extend that streak for decades to come.

Supporting shareholder value with cash

P&G’s resilient operating margin gives it wiggle room to cut prices if needed, while its competitors simply don’t have as much leeway. If P&G can sustain its high margin throughout this inflationary period, it should be able to support dividend growth and buybacks with cash flow instead of relying on debt.

In fiscal 2023, P&G generated $16.8 billion in operating cash flow, which supported $9 billion in dividend payments and $7.4 billion in buybacks.

Repurchasing shares throughout periods of volatility speaks volumes about the strength of a company’s operations and its balance sheet. Even if the stock market takes a major hit, investors can count on P&G to support buybacks and raise the dividend — which makes it easier to ride out the volatility.

Trust in P&G

P&G isn’t a cheap stock. There are plenty of bargains out there if you’re looking for that. Instead, P&G is an incredibly high-quality business with one of the best track records of any Dividend King out there when it comes to strong margins, buybacks, and dividend raises.

The current economic climate provides a stress test on P&G’s ability to navigate challenges and the effectiveness of its pricing power. P&G has passed this test with flying colors — giving investors more evidence that the stock is worth buying and owning for a lifetime.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool recommends Unilever Plc. The Motley Fool has a disclosure policy.

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