2 Dividend Kings That Look Overvalued Right Now

Companies that have raised their dividend payout each year for at least 50 consecutive years are called Dividend Kings. Typically, Dividend Kings enjoy multiple competitive moats and generate stable cash flows across business cycles, allowing them to raise dividends consistently over time. 

A widening earnings base and consistent dividend hikes have enabled Dividend Kings to deliver outsized returns to shareholders over time. However, according to one Wall Street analyst, two  top Dividend Kings look overvalued right now. Let’s see why. 

Jefferies Downgrades Two Dividend Kings

Last week, investment firm Jefferies downgraded Dividend Kings Procter & Gamble (PG) and Colgate-Palmolive (CL), citing their stretched valuations relative to the Consumer Staples Select Sector SPDR Fund ETF (XLP). 

In an investor note, Jefferies analyst Kaumil Gajrawala stated, “At today's valuations, the market is paying for better top-line growth and margin expansion. We see downside risk to these expectations as consumption slows, demand elasticities weaken, and pricing fades.”

As a result, the brokerage firm cut its ratings on both PG and CL to “Hold” from “Buy.” 

P&G stock trades at 24x forward earnings, and is forecast to grow adjusted earnings by 8.2% annually in the next five years. Comparatively, Colgate-Palmolive stock trades at 28x forward earnings, and is forecast to grow adjusted earnings by 8.5% annually through 2028. 

By contrast, the median earnings multiple for the consumer staples sector is much lower, at 17x. 

Should You Buy These Dividend Kings for Their Yield?

Valued at roughly $400 billion by market cap, Procter & Gamble (PG) is among the largest consumer staples companies in the U.S. It owns several household brands, such as Tide, Pampers, Gillette, and many more, which allows P&G to benefit from strong brand recognition, pricing power, and a loyal customer base. 

In April, P&G increased its dividend by 7% year over year, marking its 68th consecutive annual increase. It now pays shareholders an annual dividend of $4.03 per share, indicating a forward yield of 2.4%. 

In the last 10 years, PG stock has returned 118.7% to shareholders. After adjusting for dividends, cumulative returns are closer to 183%. 

Out of the 23 analysts covering PG stock, 14 recommend “Strong Buy,” two recommend “Moderate Buy,” and seven recommend “Hold.” The average target price for PG stock is $175.43, indicating an upside potential of less than 4%. 

Valued at $81.5 billion by market cap, Colgate-Palmolive (CL) is among the most trusted brands globally. It operates in multiple business segments that include home care, personal care, and pet nutrition, allowing the company to increase sales from $15.7 billion in 2020 to $19.5 billion in 2023. 

Colgate-Palmolive now generates 45% of its sales from emerging markets and the rest from developed economies. It pays investors an annual dividend of $2 per share, indicating a forward yield of 2.01%. These payouts have risen by 8.4% annually in the last 40 years. 

Over the last 10 years, Colgate-Palmolive stock has returned 86.5%, after adjusting for dividend reinvestments. Comparatively, the S&P 500 Index ($SPX) is up 229% in this period. 

Out of the 20 analysts covering CL stock, 13 recommend “Strong Buy,” two recommend “Moderate Buy,” and five recommend “Hold.” The average target price for CL stock is $102.74, indicating an upside potential of less than 3%.