Key Takeaways:
- The 2-Minute Valuation Model values Procter & Gamble stock at $188 per share in 2.5 years.
- That’s a potential 17% upside on one of the world’s leading dividend growth stocks.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Procter & Gamble ($PG) is one of the most reliable and diversified consumer goods companies in the world. However, the stock has been flat over the past 3 years and doesn’t seem likely to deliver strong returns anytime soon.
Procter & Gamble is one of the best dividend stocks in the world, boasting 68 straight years of dividend growth. Over the past decade, its dividends have increased by about 5% per year on average.
If you’re building a long-term dividend portfolio and want a stock you can buy and forget, it’s a top choice.
That said, even after a 10% drop in its stock price, the returns over the next few years are likely to be average.
While the stock is historically cheap, it doesn’t look like an exceptional investment right now.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Is Procter & Gamble Undervalued?
Forecast
On PG’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at a 3.7% compound annual growth rate over the next 3ish years, while normalized earnings per share, or EPS, are expected to grow at 5.5% per year:
View PG’s full analyst estimates >>>
For context, over the past 5 years, PG’s revenue grew at 4.4% per year, and earnings grew at 7.8% per year.
That means the company is growing just a hair slower than it used to.
Valuation Multiple
$PG stock currently trades at around $161/share, which means the stock trades at 23 times earnings.
Over the past 5 years, the stock has averaged a 24x P/E multiple, so the stock is trading right around its historical average.
We’ll use a 22x P/E multiple in our valuation to stay conservative.
In today’s market, many wide-moat, blue-chip companies are trading at P/E multiples that are double their expected earnings growth or even higher.
Put simply, investors are paying a premium for high-quality American companies.
A 22x P/E ratio could be reasonable here because the stock is expected to see 5.5% annual EPS growth and a 2.5% forward dividend yield.
Procter & Gamble is one of the highest-quality companies, and we expect the stock to continue to trade at a premium.
Fair Value
3.5 years from now, analysts estimate that Procter & Gamble could reach about $8.14 in normalized EPS. At a 22x NTM P/E multiple, that values $PG stock in 2.5 years at $179/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2.5-year valuation uses 3.5-year EPS forecast figures. Additionally, we’re using half-year figures in this calculation because Procter & Gamble’s fiscal year ends in June.)
We can tack on an extra $9/share for the dividends that the stock is expected to pay, which brings the stock’s total fair value to $188/share.
With the stock trading at about $161 today, this implies that the stock could rise about 6.4% per year over the next 2.5 years, or 17% in total:
For reference, the stock market has averaged 10% annual returns over the long term.
So it doesn’t look like Procter & Gamble offers market-beating returns.
Still, the stock could be an appealing option for dividend growth investors, as $PG is one of the most reliable dividend payers in the world and remains a staple for dividend portfolios.
Analysts don’t see much upside for $PG stock, either.
Analysts’ Price Target
The consensus price target for Procter & Gamble is currently $180 per share, based on estimates from 26 analysts. This suggests the stock has just over 10% upside today.
Over the past 5 years, when analysts thought Procter & Gamble had upside to reach its fair value, the stock tended to perform well.
The blue line below shows analysts’ estimated upside for PG stock over the past 5 years.
When the blue line was high, analysts thought the stock was undervalued. When the blue line was low, analysts thought the stock was overvalued.
The black line simply tracks $PG’s stock price, which has climbed pretty steadily over the past 5 years.
You can see analysts see just over 10% upside today for Procter & Gamble stock:
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TIKR Takeaway
Using the 2-Minute Valuation Model, Procter & Gamble stock appears fairly valued and could deliver 6% annual returns over the next 2 years.
Of course, this is just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
