Is Procter & Gamble Still A Good Investment?
harsha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Procter & Gamble (NYSE: PG) has been one of the best-known corporations in the world, brewing success decade after decade. But, since the year 2000, its business has reached a whole new level, with its brand portfolio today exceeding $25 billion, up from just $10 billion back then. With the management recently announcing the come-back of its former CEO, A.G. Lafley, who was formerly at the center of operations driving the company’s growth, to lead the company’s restructuring program and accelerate its expansion into the emerging markets, there is a whole new optimism that the company is going to repeat its success in the coming years.
With operations in over 180 countries and a very strong product portfolio, many of which are the world’s most successful brands, Procter & Gamble enjoys the trust of the best fund managers in the world, including the likes of Warren Buffet, Bill Ackman, and Donald Yacktman, with over $120 billion worth of shares held by institutions, showing the faith of the experts in this company. Should individual investors also get into this stock, or are we better off without it?
Strong product portfolio
With presence in Beauty, Grooming, Health Care, Fabric and Home Care, and Baby & Family Care sectors, the company has a very strong and diverse product portfolio with nearly $84 billion in sales and more than $10 million in net earnings. The company’s organic sales increased by 3% last year, which management intends to further with improving margins, and overall sales are expected to grow by 11% to $22.8 billion in the fourth quarter of 2013.
Strong growth in developing markets
The developing markets are providing a great platform for the company’s expansion, with 38% of the company’s sales coming from developing markets, which the company intends to further increase by entering into 20 new countries this year.
With consumer spending in emerging markets expected to increase between 7.7% and 15.2% from 2013 to 2016, and the middle class population in developing markets expected to increase by 1.37 billion people by 2020, opportunities are wide open for FMCG companies to increase operations at an accelerated pace. Procter & Gamble seems to tap this opportunity with all its might.
$10 billion cost-saving plan
Management announced a $10 billion cost-saving plan for 2016, which it intends to achieve by improving net manufacturing productivity by 5% annually. Under the plan, there will be a layoff of 5,700 workers by the end of fiscal 2013, then a further reduction of non-manufacturing jobs by an additional 2%-4% per year from fiscal 2014 through 2016.
Another $1.2 billion will be saved in annual cost of goods, and $1 billion in marketing costs, by 2016. When this plan is completed, the company’s margins will improve further, along with improving both top-line and bottom-line growth.
Procter & Gamble is a dividend aristocrat
The company has consistently rewarded shareholders with dividends for the past 57 years. Currently, it offers a dividend yield of 3.1%, which makes it a compelling stock for long-term investors. The company's giant portfolio and the decent dividend make it a stable and safe stock to own.
Add to that the fact that the company has a $5 billion-$6 billion share repurchase program lined up for 2013, which should further improve share value.
Kimberly-Clark (NYSE: KMB) is primarily involved in the manufacture of paper-based consumer products like Kleenex, Kotex, and Huggies, among others. The company has been rewarding investors heavily with dividends for the past 40 years. The company went public in 1926 and, since then, it has had a long and steady record, today yielding an attractive 3.1% dividend. It is a very stable stock with a beta of 0.3, as over 65% of its outstanding shares are held by institutions.
The company reported an excellent first quarter for fiscal 2013, with operating profits coming in at $783 million, 12% more than the same period last year. It saved $85 million through its cost-saving program, which provided a good boost to profits.
But, the issue is that earnings have not kept pace with the rising dividends, leading to an increase in the payout ratio to over 60%. Sales have increased 50% since 2003, but net income has risen by just 3%. Its debt-to-equity ratio is also very high at 140.98. Add to that, the company’s P/E ratio of 21.31 is very high compared to its average range of 15-17 over the past 10 years. Therefore, investors should give Kimberly-Clark a miss at current levels and wait for signals of improving EPS, coupled with a low P/E and improving cash, before getting into the stock.
Colgate-Palmolive (NYSE: CL) has also been a stalwart in the industry, returning 149% in the past 10 years and increasing its dividend consistently for 50 years. It is a leader in the worldwide toothpaste and toothbrush segment, with 44.6% and 32.7% market share in the segments, respectively. This dominance in the oral care market gives the company a huge economic moat.
Colgate-Palmolive has also been strong on the sales front, reporting a 6% increase in organic sales growth last year. Management announced a $1.1 billion-$1.25 billion restructuring program in 2012, which will result in annual cost savings of $275 million-$325 million after tax per annum in the coming years. The world's growing middle class, and Colgate-Palmolive’s dominant market share, leaves ample room for the company to grow in the coming years.
All the three companies have a similar forward P/E, but Procter & Gamble and Kimberly-Clark beat Colgate-Palmolive on P/B, P/S, EV/EBITDA, and Debt/Equity basis. But, as mentioned above, Kimberly-Clark is a miss for now, which makes Procter & Gamble the right option for investors. Billionaire investor, Bill Ackman, sees the company's earnings per share growing from $4 to $6 by 2016. Considering the forward P/E remains stable near 18-20 levels, the stock price could see over 50% upside by 2016.
Procter & Gamble has delivered consistent results and is still going strong with its diverse product portfolio, increased presence in emerging markets, restructuring programs, A.G. Lafley back as the CEO, positive analyst expectations, cheap valuations, and an attractive dividend. Thus, I believe the current stock price offers an attractive investment opportunity for long term investors.
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harsha lohia has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!