Dividend appeal. At first blush, what's not to love?
Shares of the consumer products giant yield more than a point better than 10-year Treasuries. Procter & Gamble (PG, Fortune 500) has raised its dividend for 56 consecutive years. And over the past five years, P&G shareholders have enjoyed a dividend growth rate more than triple the pace of inflation.
Stock risk. Even with a compelling yield, the stock should give conservative income investors pause. Over the past four years the company's annualized earnings growth nets out to zero.
P&G's lineup of premium products -- which includes Bounty paper towels and Tide laundry detergent -- hasn't fared well since the financial crisis, as households have traded down to less expensive brands.
To mollify shareholders, management has aggressively boosted dividends. Without profit growth, though, P&G's payout ratio jumped from 46% at the end of its 2009 fiscal year to around 60%.
"It's a fine company with great brands, but those are mature, premium brands that are struggling with a more price-conscious consumer," says Mike Foss, a portfolio manager for Brown Advisory. Finding the next generation of products will come at a cost: P&G's operating expenses climbed from $24 billion in 2009 to $28 billion, cutting into the bottom line.
Related: Top places for interns - P&G
Another problem is that the stock now trades at a P/E of 18.2. That's higher than the average for consumer staples stocks as well as P&G's historical multiple.
Stock or bond? Bond. The 2.2% yield to maturity on a P&G bond maturing in 2022 pays you more than 10-year Treasuries -- while letting you sidestep the potential drama of the stock.
At a glance
Bond yield to maturity: 2.2% (matures 2/2022)
Stock dividend yield: 3.0%
Dividend growth prospects Moderate
When does buying a stock make more sense than buying a bond? Here's our methodology.
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