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My Favorite Safe Dividend King to Buy Now (and It's Not Even Close)

History was made last week when the consumer staples sector suffered its worst two-day decline in over 20 years. Consumer staples stocks are favorites among retirees and income investors because they tend to pay attractive dividends and produce steady growth over time. Their competitive edge isn't their glitz and glam -- it's their reliability. So, when the sector falls by over 8.5% in two days while the S&P 500 falls by less than 3%, investors may wonder whether it is as safe as its reputation implies.

Here's why Procter & Gamble (NYSE: PG) stands out as best in breed among Dividend Kings -- which are S&P 500 companies that have paid and raised their dividends for at least 50 years.

Two people hold cleaning supplies while one sings into a mop handle.

Image source: Getty Images.

Combating inflation

P&G deserves a lot of credit for jumping on inflation early while many other consumer staples companies were caught off guard. Even with that head start, P&G isn't immune to rising inflation. The company now forecasts that these headwinds will dampen after-tax profit for fiscal 2022 (ending in June 30) by $3.2 billion. Nevertheless, P&G is still growing organic sales in all 10 of its product categories and expects to hit its full-year guidance.

When you compare the product mix of P&G to companies like Target, Walmart, or Costco Wholesale, it quickly becomes clear that P&G operates a much more focused business despite having a larger market cap than even Walmart. Many products other retailers sell are discretionary and more subject to decreased demand during rough economic cycles, whereas consumers are less likely to curb spending on toothpaste, laundry detergent, dish soap, and other P&G products during a recession.

If anything, a cost-conscious consumer would likely shift from a more expensive brand of self-care or household cleaning products to a P&G product during a recession. The same can't be said for purchases of outdoor furniture or a new TV, which consumers are more likely to put off altogether during a recession.

The retail inventory problem

Results from Walmart and Target indicated that inventories are building and are higher than expected -- which suggests these companies over-ordered, anticipating higher demand than was necessary. Retailers were also used to higher lead times during the pandemic and, therefore, were pressured to order higher quantities of goods ahead of time.

The inventory positions for Target, Walmart, and Costco are much more precarious than for a company like P&G. These firms must try to forecast consumer trends, shift their product mixes, and scramble to raise prices to combat inflation. P&G has an easier path forward. It can simply continue doing what it does best -- growing its brands and relying on a massive network of in-store and online retailers.

P&G, like Coca-Cola and a handful of other consumer staples companies, also benefits from geographical diversification, which leaves it less susceptible to U.S.-specific economic issues.

Focusing on what matters most

P&G showcases why revenue isn't everything when evaluating a consumer goods company. The following chart shows P&G's revenue, net income, and free cash flow (FCF) over the last 10 years.

PG Revenue (TTM) Chart

PG Revenue (TTM) data by YCharts. TTM = trailing 12 months.

Between its fiscal 2015 and fiscal 2017, P&G began a restructuring that reduced its brand count from 170 to 65 and its product categories from 16 to the current slate of 10. The result was a collapse in revenue. But that restructuring set the stage for years of earnings and FCF growth. The results speak for themselves.

P&G is generating gobs of free cash flow, which supports ongoing dividend raises and a record-high number of share buybacks. Investors in P&G benefit from dividends because they provide a passive income stream without having to sell the stock. And share buybacks reduce the outstanding share count and lead to higher earnings per share, which makes P&G an all-around better value for its shareholders.

A company you can count on

Few companies are as dominant in their industry or as reliable as Procter & Gamble. The company's organic sales growth is impressive for its industry, especially given how massive P&G is. P&G has paid and raised its dividend for 66 consecutive years and can support plenty of future dividend raises with free cash flow. With a dividend yield of 2.6%, P&G looks like a great buy for risk-averse investors who prioritize capital preservation and income over growth.

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Daniel Foelber has positions in Walmart Inc. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool recommends Target. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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