Prediction: This Will Be the First Half-Trillion-Greenback Dividend King (and It is Not Coca-Cola)

With the S&P 500 seemingly hitting a brand new all-time excessive day by day, traders are looking the marketplace for the most popular industries and contributors to the rally. The most important issue within the marketwide rally is the tech sector — particularly massive tech — the place the market caps have gotten so massive that just a few firms alone can transfer all the market.

There are at the moment 5 firms with a market capitalization of over $1 trillion: Apple, Microsoft, Alphabet, Amazon, and Nvidia. And there are simply 12 firms with a market cap of over half a trillion {dollars}, that are these 5 plus Meta Platforms, Berkshire Hathaway, Tesla, Eli Lilly, Taiwan Semiconductor, Broadcom, and Visa.

It might take some time, however I imagine that inside the subsequent three to 5 years, Procter & Gamble (PG 0.33%) will turn into the primary firm with over 50 consecutive annual dividend raises — generally known as a Dividend King — to surpass $500 billion in market worth. Here is why P&G has what it takes to achieve this milestone.

Picture supply: Getty Photographs.

The frontrunners

There are at the moment 54 Dividend Kings, however solely seven of them have a market cap of round $200 billion or extra.

WMT Market Cap knowledge by YCharts

Walmart is the chief with a $437 billion market worth. It will want to realize simply 14.4% to achieve $500 billion. I like Walmart, however the rally since its final reported earnings has been largely unjustified. Walmart is coping with a slew of challenges. And in contrast to its peer Goal, which stays down over 47% from its all-time excessive, Walmart is down lower than 5% from its all-time excessive.

Goal has extra of a client discretionary combine than Walmart, and it mismanaged its stock and provide chain in current occasions. Nonetheless, the very fact stays that Walmart is going through low development. Its internet revenue is nearly unchanged from 10 years in the past, and its working margin is comparatively low as properly.

WMT Income (TTM) knowledge by YCharts

After reporting fiscal 2024 third-quarter leads to November, Walmart inventory initially offered off earlier than falling even additional, to round $150 a share. It has been a large bounce since then for no actual motive. Walmart continues to be a stable long-term holding for its recession resilience and rising dividend. However the above market valuation with a price-to-earnings (P/E) ratio of about 27 leaves an excessive amount of room for a sell-off.

The right Dividend King

P&G has to outperform Walmart by fairly a bit to beat it to $500 billion in market worth. However there are just a few causes it might pull this off.

PG Income (TTM) knowledge by YCharts

P&G is producing virtually as a lot free money stream (FCF) as internet revenue. Income development has been stable, and its margins have held up regardless of a difficult working atmosphere. P&G has a number of companions and offers by way of completely different gross sales channels, so it may maintain greater margins than a pure-play retailer. Regardless of clocking in at a whopping $348 billion market cap, P&G is a lean enterprise.

P&G routinely generates way more gross sales than it must run the enterprise — therefore the excessive margins and FCF. It passes that money stream to shareholders by way of a rising dividend and buybacks.

Whereas dividends will not assist P&G develop its market cap, they supply an incentive to carry a inventory by way of durations of volatility. Not solely is P&G one of many longest-tenured Dividend Kings, however its dividend additionally yields 2.6%, which is sort of a bit greater than Walmart’s 1.4%.

As for the buybacks, P&G has lowered its excellent share rely by 13% over the previous decade in comparison with 16.6% for Walmart. Each firms have finished a wonderful job boosting earnings per share by way of buybacks, which has helped make each firms a greater worth when natural development is sluggish.

P&G additionally seems to be like a much better worth than Walmart. P&G sports activities a P/E ratio of 24 and a price-to-FCF ratio of 25.1. By comparability, Walmart has a P/E ratio of 26.9 and a price-to-FCF ratio of 34.6.

Coincidentally, Coca-Cola has an nearly an identical valuation to P&G, with a P/E ratio of 23.9 and a price-to-FCF ratio of 25.4. The distinction is that Coke must almost double to achieve $500 billion in market dimension. Coke is a worthy dividend inventory with a stable 3.1% yield. However on the subject of a race amongst Dividend Kings, it is simply too small and much like P&G to compete right now.

A high quality firm with room to run

It would not shock me if Walmart touched a $500 billion market cap earlier than P&G on a whim of market exuberance. However by way of which firm will surpass that market cap and keep above the brink, I feel no Dividend King holds a candle to P&G.

P&G is, in some ways, an ideal enterprise. There may be nearly nothing to not like about it. Regardless of enhancing fundamentals, the inventory has gone virtually nowhere during the last 12 months and is down round 10% from its all-time excessive. That makes it stand out as a shopping for alternative.

It could take three to 5 years, but it surely would not shock me one bit if P&G good points at the very least 43% to surpass $500 billion in market worth — all whereas rewarding its shareholders handsomely with predictable buybacks and a rising dividend.