Why P&G Is a Great Stock to Hold Into Retirement


If you're nearing retirement, Procter & Gamble (PG) might be a good addition to your stock portfolio. Its personal care focus, its history of creating new products to meet consumers' needs, its near 50% dividend payout and its strong cash flow give it a stable outlook and make it a compelling choice for those looking to buy and hold quality stocks.

P&G is the market leader in a highly competitive personal and home care industry that includes players like Unilever (UL), Colgate-Palmolive (CL) and Kimberly-Clark (KMB). Trefis puts a $75.25 price estimate on P&G stock, roughly a 15% premium over its current market price.

Stable Outlook

New technologies can become obsolete, and sales of luxuries goods often swing widely with economic cycles. Necessities, though, are here to stay: Consumer demand for items like detergent, shampoo, razors and skin creams often holds up even when households forfeit discretionary spending.

P&G's well-diversified business derives less than 40% of its sales from North America, while 35% come from developing markets in Asia and Latin America. This helps cushion business or economic shocks from any particular region, which lends it added stability.

All of this has been reflected in P&G's stock price, which remained relatively stable during the economic downturn from 2007 through 2008. In the past year, P&G's stock has increased steadily by about 10% to current levels of around $65.

Innovation Provides Growth

P&G frequently ranks among the most innovative and admired companies in the U.S. according to number studies such as CNN Money's annual ranking.

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With R&D spending at around $2 billion in the fiscal year that ended June 2010, P&G products have been around for over 170 years backed by innovation, which shall help it maintain and even grow its market share in the future as well.

P&G bests its peers with a 14% cash-conversion ratio, which captures the company's operational efficiencies. This is mostly driven by economies of scale, and shows how efficiently the company converts sales to cash. This in turn helps P&G maintain a healthy dividend payout ratio, which is around 48% of the cash it generates. We wrote a note discussing this -- Procter & Gamble's Cash Flow Bests Peers, Justifies 20% Upside.

For retirees, the dividend constitutes a regular income stream, and P&G boasts 55 consecutive years of increasing dividends at an average annual growth rate of over 9%. This kind of cash flow and earnings profile is why it can count Warren Buffett as one of its shareholders: Berkshire Hathaway owns more than 3% of P&G.

You can see a detailed analysis of our $75.25 Trefis price estimate of Procter& Gamble's stock here.

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