Procter & Gamble didn't give investors much in the way of good news when it posted third-quarter earnings results Thursday morning. Profits were down, organic sales growth slowed, and the consumer goods giant lowered its revenue outlook for the full fiscal year.
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On the bright side, P&G is running ahead of management's cost-cutting goals. And that points to a potentially huge earnings improvement once foreign currency swings calm back down. Still, these weak results show why management raised P&G's dividend by just 3% last week -- for its stingiest payout boost in years.
Weak sales growth
The company posted a 1% organic sales growth improvement in the quarter that just closed. That's a slowdown from the 2% gain it saw in each of the prior two quarters. For comparison, 4% organic growth, like P&G booked in fiscal 2011, constitutes a solid year for the company.
This quarter's 1% uptick also came entirely from higher prices. Volume slipped in four of P&G's five product lines. And companywide, the consumer goods giant moved 2% fewer units than over the same period last year. Management doesn't expect things to get much better next quarter, either. P&G on Thursday scaled back its organic sales growth outlook from "low-to-mid" single digits to simply "low" single digits.
Meanwhile, reported profits are expected to fall by 22% for fiscal 2015. That drop will mostly be thanks to short-term foreign currency swings over which the company has no control. This quarter, for example, currency moves turned what would have been a 10% profit gain, powered by cost cuts, into an 8% dip.
The earnings crunch might be short-term in nature, but it still removes cash that P&G could otherwise have used for dividend payments. As it stands now, dividends are eating up an alarming amount of reported profit. In fact, through the past nine months dividend payments were a whopping 81% of operating earnings. Things look slightly better on a trailing-12-month basis. But P&G's payout is still elevated when compared to other huge dividend payers like Wal-Mart.
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Growth should continue
The good news for dividend investors is that there are two big reasons to expect P&G payouts to keep climbing despite the historic earnings pinch. First, P&G is a cash-generating machine. Free cash flow is up 19% so far this year. And the dividend payment ($5.4 billion) looks much more affordable when you compare it to cash flow ($8.2 billion) rather than operating earnings ($6.6 billion).
And second, P&G's profitability is growing, even if that improvement is being hidden by foreign currency movements. Management credits productive savings for pushing operating profit margin higher by 410 basis points this quarter. Unfortunately, a 200-basis-point pinch from the strong dollar helped turn that into a drop in reported profitability. But just as P&G's payout ratio understates the strength of its dividend, its reported operating profit margin makes the business look weaker than it actually is.
There's no getting around the fact that sales growth will be sluggish for P&G this year. And a historic strengthening of the U.S. dollar against other currencies should chop earnings down by as much as 22% from the prior year. However, P&G's dividend payout is well-covered by cash flow and promises to bounce higher once these short-term issues are resolved.
The article Procter & Gamble Co. Earnings: What Dividend Investors Need to Know originally appeared on Fool.com.
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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