Procter & Gamble’s Current Appeal

By Douglas Ehrman - September 12, 2012 | Tickers: JNJ, KMB, PG, UL | 0 Comments

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When scanning the market for which stocks to include in your core portfolio, it is easy to focus on names with a great story and plenty of flash. Stocks that quietly show up for an honest day’s work are called names like defensive and anti-cyclical, making us remember that we want the prom queen and the starting quarterback in our portfolios, not the math tutor and the president of the chess club. Leaving the mixed metaphors wrapped in mixed metaphors aside, often it’s the smart stocks that prove to be the best investments over time. As conditions currently stand, Procter & Gamble (NYSE: PG) is just such a stock that should be included in your core portfolio.

Beautifully Boring

The list of positive factors for this stock is extensive, yet no single item jumps off the page as an audible gasp type detail. Some of these factors are as follows:

• Despite a slight contraction in revenues, to $20.21 billion from $20.45 billion a year earlier, the company grew income by 45%; net income rose from $2.51 billion to $3.63 billion as of the last earnings report.
• P&G has paid a dividend for the last 122 years, with increases being recorded in the last 56 consecutive years.
• The company has instituted a cost saving initiative aimed at saving $10 billion.
• Of P&G’s globally diversified business, only 32% of revenues are derived from emerging markets, leaving plenty of room for growth.
• The company is planning to release nine new products in the next few months to both grow revenues and address the complaint that it has grown stagnant and failed to expand its product offerings.

Few companies offer the long-term stability that is included with a P&G investment. The company’s 3.3% dividend yield gives it a solid income element. At a time when U.S. Treasuries are yielding less than 2% and yield in any form is scare, this is an option that will provide a reliable income stream.

The Landscape

Where P&G becomes slightly more difficult to decipher is when it is compared to its close peers, all of which are closely bunched in terms of the major fundamental metrics. In terms of valuation, P&G trades at a P/E of 20.9 relative to 18.7 for Johnson & Johnson (NYSE: JNJ), 19.1 for Kimberly-Clark (NYSE: KMB) and 19.5 for Unilever (NYSE: UL). Each of these companies have a dividend yield above 3%, an operating margin between 14 and 25% and PEG ratios that suggest that these names offer more than fair compensation for the growth offered by each. Based on these factors, each of these companies looks to be an attractive option as an income generator in one’s portfolio.

These companies are also attractive under the circumstances that exist in the broader market. The S&P 500 is up nearly 25% over the last year, meaning that there are fewer great values available than when the market is flat or down. During the same period, P&G is up only 10.5%, but sheer upside performance is not the reason to own this stock. These types of companies are attractive as core holding because they provide stable returns and regular income.

PG data by YCharts

The Trade

Given the limited differentiation that can be made between P&G and its competitors, you may ask why this company is the preferable choice. While diversification is always prudent, P&G stands slightly ahead of the pack because of its long-term stability and due to forward-looking positives. With a dividend history that spans nearly a century and a quarter, you can count on its income stream. Looking forward, the cost-cutting, new products and the $1.8 billion involvement by activist investor Bill Ackman through his Pershing Square Capital Management earlier in the quarter are strong positives. While P&G does not represent a flashy investment option, it should form a solid part of your core holdings.

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