My Top Value Stock to Buy for 2022 (and It's Not Even Close)

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Market volatility is back. Rapid swings up and down can cause many investors to feel uneasy about their financial wellbeing. But volatility and a baseline amount of risk are par for the course in the U.S. stock market, and it’s important to understand that both known risks (rising interest rates, valuation concerns, the ongoing pandemic) and unknown risks can cause equity valuations to drastically fall, or even go to zero.

However, certain companies have a reputation for weathering tough times, and Procter & Gamble (NYSE:PG) is arguably the most stable all-around U.S. company. Here’s why it’s a top value stock to buy and hold for decades.

Image source: Getty Images.

Consistency in spades

A picture — or in this case a table — can be worth 1,000 words. The below table shows financial metrics from P&G’s past five fiscal years (FYs). P&G’s fiscal calendar begins on July 1 and ends on June 30, so FY 2021 represents the 12-month period between July 1, 2020, and June 30, 2021.

Metric

FY 2021

FY 2020

FY 2019

FY 2018

FY 2017

Sales

$76.1 billion

$71 billion

$67.7 billion

$66.8 billion

$65.1 billion

Organic Sales Growth

6%

6%

5%

1%

2%

Core EPS Growth

11%

13%

7%

8%

7%

Operating Margin

23.6%

22.1%

20.4%

20%

21.2%

E-Commerce Sales

$10.7 billion

$7.1 billion

$5.4 billion

$4.5 billion

unknown

Operating Cash Flow

$18.4 billion

$17.4 billion

$15.2 billion

$14.9 billion

$12.8 billion

FCF Per Share

$5.99

$5.46

$4.68

$4.20

$3.42

Core EPS

$5.66

$5.12

$4.52

$4.22

$3.92

Dividends Per Common Share

$3.24

$3.03

$2.90

$2.79

$2.70

Data sources: Procter & Gamble, YCharts, Yahoo! Finance 

There’s a lot to unpack here, but it’s worth discussing to get the full picture of what makes P&G unique. For starters, we see consistent revenue growth, low-to-mid-single-digit organic sales growth, and core earnings per share (EPS) growth that outpaces the organic sales growth rate. That’s a good sign that P&G is becoming a more efficient business by converting more sales into profit (as reflected by its rising operating margin).

Another nice growth category is e-commerce, which now makes up 14% of P&G’s sales. Its operating cash flow and free cash flow (FCF) per share have both increased each year over the past five years, which has supported the company’s ability to pay and raise its dividend with cash, not debt. In sum, we see a business that is growing its top and bottom lines and also generates record-high operating cash flow. It has also raised its annual dividend for 65 consecutive years, making it one of the longest-tenured Dividend Kings on the market.

Beyond the numbers

P&G’s impressive financial metrics are the result of a massive strategic shift that took place between FY 2015 and FY 2017, when P&G cut its brand count from 170 down to 65 and eliminated six product categories. This process reduced its revenue from record-high 2013 and 2014 levels but made the overall business healthier, leaner, and more efficient. The P&G of seven-plus years ago was trying to grab market share across various industries and many different developing markets. The P&G of today is focused on its best brands and its strongest geographies (like the U.S and China), and is growing its e-commerce business. 

A well-deserved premium valuation

Unfortunately for new investors, P&G’s impressive performance and successful strategic shift didn’t go unnoticed. In fact, one glance at its valuation may raise eyebrows as to how this mega-cap stalwart can be classified as a value stock. After all, P&G’s price to sales, price to earnings, and price to FCF ratios are all well above their five-year medians because share prices of P&G are up over 91% in the past five years, outpacing the rate at which the company has grown its sales, earnings, and FCF.

PG PS Ratio data by YCharts

However, there’s a good argument as to why P&G remains a top value stock, even at its more expensive price. While it’s easy to get caught up with price action and short-term movements, investors are, at the end of the day, becoming part-owners of a business when they buy stocks. P&G is a very well-run business that has quite possibly the best track record for generating consistent earnings, delivering growth, raising its dividend, and buying back shares no matter the market cycle.

A balanced buy for 2022 and beyond

P&G isn’t the fastest grower, the highest earner, or the highest-yielding dividend stock. But it does offer a balance of characteristics that make it a solid performer through thick and thin. P&G has a respectable dividend yield of 2.1%, which is probably a little too low to supplement income in retirement. However, given P&G’s track record for raising its dividend, the yield could very well get above 3% again if the stock price languishes. And if the stock goes up, investors are sure to be happy either way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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