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Procter & Gamble (PG) is a high-quality Dividend King, which is a part of the portfolio of many income-oriented investors. In fact, Procter & Gamble comprises a substantial part of some ETFs that O’Shares Investments offers to income-oriented investors. O’Shares Investments is well-known for its focus on high-quality companies, which have rock-solid business models that secure long-term earnings growth and generate excessive free cash flows. Procter & Gamble undoubtedly meets these criteria.

However, after a multi-year rally, shares of P&G seem overvalued right now. Investors should wait for a better entry point before buying shares.

Business overview

Procter & Gamble has an impressive dividend growth record, as it has raised its dividend for 64 consecutive years. This is one of the longest dividend growth streaks in the investing universe. Procter & Gamble thus belongs to the group of Dividend Kings, which includes the companies that have grown their dividend for at least 50 consecutive years.

After a multi-year period of slimming down its product portfolio, P&G has enjoyed renewed efficiency. It divested nearly two-thirds of its brands in order to get rid of the low-growth, low-margin products and focus its growth efforts on its most promising brands. As a result, it reduced the number of its brands from 170 to 65.

The drastic transformation plan has born fruit in the last three years. The company grew its earnings per share by 8% in 2018 and by another 7% in 2019. Even better, the consumer staples giant has greatly benefited from the pandemic this year, as people stay at home more than ever and thus they have significantly increased demand. As a result, Procter & Gamble is on track to grow its earnings per share by 23% this year.

It is also remarkable that Procter & Gamble has exceeded the analysts’ earnings-per-share estimates for 21 consecutive quarters. This is a testament to the strong business momentum of the consumer staples giant. The strong momentum is also clearly reflected in the organic sales growth, which was 9% in the latest quarter and has remained above 5% in each of the last five quarters. This performance is in sharp contrast to the performance of Procter & Gamble between 2011 and 2017, when revenue had stalled.

Valuation

Thanks to the popularity and the strength of its brands as well as its resilience to recessions, the stock of Procter & Gamble has always enjoyed a premium valuation. Moreover, thanks to its strong business momentum, the stock is currently trading near an all-time high level, at a price-to-earnings ratio of 24.8. This is nearly the richest valuation level of the stock in the last decade. The rich valuation of Procter & Gamble has resulted in a modest dividend yield of 2.3%, which is a decade-low dividend yield for the stock.

The above are signs that Procter & Gamble is overvalued right now. If the pandemic subsides next year, as expected, the business performance of the company will somewhat decelerate and its valuation will probably revert towards its historical range. Therefore, investors should probably wait for a more attractive entry point before purchasing the stock.

Final thoughts

Procter & Gamble has one of the longest dividend growth streaks in the investing universe. As a result, it is one of the first candidates to be examined for an income portfolio. However, thanks to its impressive business momentum, Procter & Gamble is overvalued right now. As a result, investors should wait for a meaningful correction of the stock before they initiate a position.