A rising Tide: Procter & Gamble could put a shine on your portfolio

Procter & Gamble (PG) is probably the strongest consumer-staples stalwart on a U.S. exchange. Long considered one of the best-managed companies in the country (making everything from Tide detergent to Crest toothpaste to Pampers diapers), this component of the Dow Jones Industrial Average ($INDU) has made great strides in shedding lower-margin businesses while buying or building out more profitable ones. (Olay beauty products for $130, anyone?)

As Jefferies & Co. analyst Douglas Lane told clients when he initiated coverage with a buy in September: "[The company's decision] to make fiscal 2010 an investment year provides a powerful catalyst for share outperformance over the next 12 to 36 months. Additionally, the stock has been trading at a market discount recently for the first time since we exited the last recession."

Oh, and what a discount it is. Shares currently offer a discount of 30 percent to the broader market on a forward price/earnings (P/E) basis, according to Thomson Reuters, and a 24 percent discount to P&G's own five-year average. By the price/earnings-to-growth ratio (PEG), shares trade at discounts of 27 percent to the market and 11 percent relative to P&G's five-year average. These measures indicate that the stock is deeply cheap on a relative valuation basis.

Finally, P&G has large, predictable cash flow, making the 3.1 percent dividend yield something shareholders can bank on. "Historically, P&G converts 100 percent or more of its net income to cash, which it has used to fund a stable and growing dividend (10-year compound annual growth rate of more than 11 percent) and nearly $40 billion of share buybacks over the past four years," Lane notes.

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