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Trust in Dividends: Procter & Gamble

Dividends might be the best indicator of a company’s strength in this market, Cramer said Tuesday. Or, more to the point, a company’s ability to either raise that payout or maintain it at all. In an environment where earnings estimates can’t be trusted to value stocks, a continued focus on rewarding shareholders might be the next best thing.

The logic is simple enough: A company won’t raise its dividend if management sees trouble on the horizon. And as we’ve seen many times recently, cutting the dividend to preserve capital is often the first life-saving measure a company takes. So when a company instead shows that it is committed to the payout, investors can take that as a bullish sign.

On Monday, Cramer highlighted Air Products because it had just raised its dividend. For today’s show, he turned the spotlight on Procter & Gamble because, in the very least, it has the ability to. The stock may be down $20 from its high, but P&G has raised its dividend for 52 consecutive years. Cramer doesn't think 2009 will be any different.

Sure, the dividend yield is a mere 3.3%, but it’s the underlying business that is most important. This, after all, is why P&G is capable of giving back more to shareholders. Procter gets 61% of its sales from overseas, so the declining U.S. dollar is a big plus for the company. International revenues will translate into more profits here at home. This couldn’t come at a better time because sales actually declined last quarter because of the strong dollar’s impact.

Lower commodity and energy costs are another plus for Procter. Wider margins equal bigger profits. The company also has been able to pass 75% of its costs onto consumers, and they won’t rescind those increases just because oil is down. They’ll pocket the difference.

Another noteworthy fact: Five of the top 10 new products in the U.S. during 2008 came from P&G. They innovate to thrive and use that ingenuity to stay in the game when consumers are trading down to cheaper brands. In fact, they’ve also played the trade-down game by offering less expensive versions of their own brands.

Cramer fully expects Procter & Gamble to boost its dividend, as it always has. In the meantime, P&G buyers have the chance to capture some upside. The stock has traded at about 15 times earnings between 2000 and 2007, but now trades at 11. With the rest of the cohort trading at about 14, P&G could jump 23% if it catches up.



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