Tag Archives: NYSE:PG

Berkshire Hathaway’s Most Undervalued Dividend Stalwarts

Both Procter & Gamble and International Business Machines are experiencing multi-year transformations. It is exactly for that reason that both are trading at historically high yields, and patient investors can start dollar-cost averaging into these dividend stalwarts with at least 20 years of dividend growth history.

Introduction

On reviewing Berkshire Hathaway’s top 15 holdings listed in its 2014 letter to shareholders, I found out the two most undervalued companies are actually a couple of my core holdings. They are Procter & Gamble Co (NYSE:PG) and International Business Machines Corp (NYSE:IBM). They are cheap for a reason though. Both are experiencing multi-year transformations.

Procter & Gamble’s Transformation

Transformation is a slow process. Especially for a huge company such as P&G, it could take several years to unfold. Procter & Gamble intends to shed off roughly 100 non-core brands, over half of its existing brand portfolio, in an attempt to focus on its core brands, such as the 23 brands that generate over $1 billion in annual revenue.

For example, in July 2015, Procter & Gamble accepted an offer of $12.5 billion from Coty to merge 43 P&G products with Coty. This transaction is tax-efficient in nature, and P&G estimates the one-time gain to be from $5 to $7 billion depending on the final deal value when it closes.

Due to this transaction and the Duracell sale to Warren Buffett for around $4.7 billion, Procter & Gamble intends to return $70 billion to shareholders from fiscal year 2016 to 2019 in dividends and share retirement, while maintaining its current credit ratings.

You can learn more about the Coty transaction.

Procter & Gamble’s Valuation

In today’s market, it’s rare to find Morningstar rating a company 5 stars indicating extreme undervaluation. Well, Procter & Gamble gained that status.

Cross-checking with F.A.S.T. Graphs, Procter & Gamble is also undervalued based on the price-to-cash-flow ratio. The graph indicates the shares are at least 7% undervalued.

PG valuation graph

Procter & Gamble: A Dividend Stalwart of 59 Years

Around $70 per share, its yield of 3.77% is historically high for the company. The chart below shows the fiscal year-end yields, and the highest yield shown is 3.5%. Read More