4 Signals Dividend Stocks Such As Procter & Gamble Are Near Pullbacks
Investing.com | Mar 19, 2019 04:21AM ET
Perhaps lost in the hubbub about the stock market's handsome gains so far this year, as well as the boost of more than 20% since bottoming on Dec. 24, is how long fixed-income, defensive equities can keep on rallying.
Procter & Gamble (NYSE:PG) and similar stocks have enjoyed quite a run. Shares of P&G are up more than 16% since Christmas and more than 40% since they bottomed in May 2018. The stock has hit 14, 52-week highs just since Feb. 1 after a bullish earnings report in January. The consumer staple giant's shares are currently trading near the top of their range, closing yesterday at $101.51.
Rival Colgate-Palmolive (NYSE:CL) and utility companies are seeing similar gains. The Dow Jones Utility Average finished Friday at a 52-week high. Consolidated Edison (NYSE:ED) hit a 52-week high last Thursday.
These stocks aren't rising because of fantastic sales growth; in general their performance has been modest but steady. Rather, investors are signaling they will be content if they see growth in earnings per share that supports and expands dividend payouts, in part because they don't see the Federal Reserve raising interest rates any time soon.
P&G's $2.87 a share annual dividend represents a 2.80% yield and may be boosted in April. Colgate-Palmolive's annual $1.72 dividend is yielding 2.6% while Con Ed's annual $2.96 dividend yields 3.49%.
But at some point these stocks will see a hiccup, at the very least, and share prices will fall, presenting some good buying opportunities for those paying attention. Investors should be on the watch now for warning signs. Four are especially critical:
h2 1. Price/h2P&G shares are now selling at a rich 24.9x trailing 12-month earnings and have outperformed Colgate-Palmolive over the last year. Colgate-Palmolive, which makes consumer staples such as dental-care products, soaps and pet foods, is right behind at a 24.4x multiple. Both are ahead of the S&P 500's current multiple of 21x. Con Ed’s multiple stands at 19.4x.
Prices for all three stocks are ahead of consensus estimates from analysts, which suggests they have moved up too far. And remember, a stock like P&G or a utility isn't going to grow anywhere near as fast as Cisco Systems (NASDAQ:CSCO), which keeps hitting new highs and is up more than 20% this year.
h2 2. Business Fundamentals/h2
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Two years ago, P&G was in an existential crisis. Many of its biggest brands were losing market share—and it owns some globally recognized names including Tide, Dawn, Pampers, Crest and Charmin.
At the same time that the consumer staples giant undertook an expensive proxy fight with activist investor Nelson Peltz, it was trying to cut costs, slim down, bust up a stodgy infrastructure and put some fire back into those brands.
P&G is starting to see results of a turnaround plan that included selling off some 100 businesses. The company's first-and-second quarter 2019 earnings and revenue beat estimates. The second-quarter results, released on Jan. 23 pushed P&G shares up 4.9%.
Still, a stumble on any relatively strong results can clobber a stock. But for fixed-income shares, at least there's the dividend.
h2 3. Trade /h2The U.S.-China trade dispute remains unsettled, with some sources characterizing the current stalemate as heading into overtime . If the trade talks fail, like the negotiations with North Korea, that could mean a new round of market volatility and currency gyrations, which can affect earnings.
h2 4. The Fed/h2The value of a dividend to an investor is a function of the dollar amount paid and interest rates. Right now, the Fed is the friend to all companies that use their dividends to attract investors. Rates are low and likely to stay that way for some months. That’s good for P&G, Colgate-Palmolive or Con Ed, which also need low rates to finance improvements to their systems.
So far, the price question is probably the biggest issue for a P&G or Colgate. How the businesses perform and the trade question are the next wild cards. And always, it pays to watch the Fed, just in case.
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