This Conglomerate Rewards Shareholders & Is Poised for Success

Justin 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) reported strong second-quarter earnings after falling on hard times due to over extending itself aboard over the past year in addition to jumping into new business segments with high costs. The company's strong earnings are the manifestation of a clear plan of action set in motion by CEO Bob McDonald. The key to the CPG business is product development along with operational excellence. Procter and Gamble has long been a leader in product development, but has recently experienced tightening margins and rising costs. This past quarter marks P&G coming out of a period of poorly managed costs and into one characterized by strong margins and incremental sales growth. The company's second quarter results are as follows:

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(P&G Earnings Release)

These results show a substantive increase in operated income and diluted EPS along with a near 8% increase in operating margin. This comes on the heals of the company committing itself to cutting costs and focusing on its core businesses. Chairman, President, and CEO Bob McDonald stated:

Our second quarter results were at the high end of our expectations on the top-line and well ahead of forecast on operating profit, earnings per share and cash flow. Global market share trends improved as we continued to implement our growth strategy and made very good progress against our productivity and cost savings goals. Our strong first half results have enabled us to raise our sales, earnings and share repurchase outlook for the fiscal year, while we strengthen investments in our innovation and marketing programs.

These words by McDonald illustrate the company's strength and commitment to shareholders. For investors, the main two reasons to buy P&G are: 1. a strong and stable blue chip and 2. a company with a clear commitment to its investors through dividend growth and share repurchases. This combination provides investors with a stable and viable investment opportunity.

From an investors perspective, P&G offers shareholders a near unprecedented diversification through an array of staple divisions from Bounty to Chairman to Cascade. All of these divisions require a commitment to innovation along with a constant look at how costs can be controlled in an already tight margin industry. The company is committing itself to expansion in emerging markets in areas like oral care along with diaper innovation. These steps on behalf of P&G will allow the company to stay ahead of its competition in terms of product development and geographic positioning.

Even more, though, than the fundamental strength of P&G is the company's commitment to its shareholders through dividend return and growth along with a consistent share repurchasing program. The company affirmed in its second-quarter earnings that it would return $5 to $6 billion in stock repurchases to investors (from an initial estimate of $4 to $6 billion). This commitment that P&G has to shareholders does two things. First, it shows the company's commitment to returning its operating cash-flow to investors, and secondly it illustrates P&G's ability to drive earnings and revenue over time. For investors, the combination of stock repurchases and dividends is nearly 5% per year. This means that with no market capitalization, P&G is still returning investors nearly 5%.

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(P&G Earnings Release)

From a valuation perspective, P&G is not cheap but provides investors with a long-term fair value proposition due to its stability and investor return. Below are P&G's valuation metrics as compared to Clorox (NYSE: CLX)):

Forward Price/Earnings: 16.92

  • Clorox: 16.68

PEG Ratio: 2.36

  • Clorox: 2.24

EV/EBIDA: 12.15

  • Clorox: 11.38

Profit Margin: 15.50%

  • Clorox: 9.89%

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(Yahoo! Finance) 

These metrics illustrate that although P&G is not cheap, it is also not expensive. For investors, P&G represents a long-term investment and not a short-term trade. This past quarter reaffirms P&G's strength and position within the market. Investors should keep a close eye on how the company is controlling costs in the coming quarters as this is what will determine whether the company can maintain its strong margins. P&G rewards shareholders and is positioning itself for long-term success with product innovation along a commitment to continued cost reduction.

(All financial metrics referenced above are obtained from Yahoo Finance, CNBC Analytics, S&P Capital IQ and Thomas Reuters.)


 JustinWeinstein has no position in any stocks mentioned. Justin Weinstein is only expressing opinion in the aforementioned text and is not advocating investors to buy, sell, or short any stock mentioned. The Motley Fool owns shares of The Clorox Company. 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!

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