Procter & Gamble

The Procter & Gamble Company (P&G) provides branded consumer products worldwide. The company operates in three global business units: Beauty, Health and Well-Being, and Household Care. P&G was founded in 1837 and is a Dividend Aristocrat meaning it has raised its dividend for at least 25 years.

At a share price of $45, P&G has a market cap of about $132 billion. The stock currently pays a quarterly dividend of $0.40/share, yielding over 3.5%. Analysts estimate that P&G will earn $4.25 in FY09 and $4.11 in FY10. Using the FY10 estimates, P&G’s forward PE ratio is 11 and its dividend payout ratio under 40%.

P&G generates a tremendous amount of free cash flow (cash flow after capital expenditures). In FY2008 (ending 6/08) the company had free cash of $12.2B in 2008 and that was up from $8.7B in FY2006. We expect free cash flow to be over $13B this fiscal year, so P&G is selling for a little more than 10x free cash.

At 12/31/2008 P&G had total debt of $41.7B. P&G is rated AA- by S&P and Aa3 by Moody’s. (One bond issue, the 4.85% notes due 12/15/2015, trades at about 1% over a comparable Treasury. By way of comparison, GE Capital’s nearest bond issue trades at about 4.6% over a comparable Treasury and Medtronic's nearest bond is trading at 1.8% over Treasuries.) P&G has a defined benefit pension plan and other post retirement benefits that were underfunded by $3 billion as of 6/30/08.

Management is well-regarded, deservedly so, in our opinion. The company’s portfolio is full of great consumer brands like Pampers, Tide, Crest and Gillette and is in many defensive product areas (you have to buy laundry detergent). P&G is also geographically diverse with significant sales in both developed and emerging markets. We believe that P&G is well positioned to manage through a difficult 2009 business environment. Even assuming that business is tougher than currently anticipated, we view P&G stock acquired in the mid $40’s as very attractive.

(Disclosure: Harvest Financial Partners owns Procter & Gamble in its client portfolios. The author owns Procter & Gamble in his personal account. Positions may change at any time.)