Will Procter & Gamble Continue to Dwindle?

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Procter & Gamble (NYSE: PG) isn’t showing signs of growth despite its program to cut in non-manufacturing jobs. Moreover, the company’s stock slightly rose in recent weeks, but is still dragging behind the market. What is up ahead for Procter & Gamble? Let’s examine the company’s main operations and recent decisions in order to try and figure what’s up ahead for this consumer product company.

The Company has announced it will not only cut 5,700 jobs, which is nearly 10% of its non-manufacturing jobs by the end of 2013 fiscal year, but it will also cut an additional 2% - 4% of non-manufacturing jobs in 2014-2016. In addition, the company plans to repurchase $6 billion of its shares during this fiscal year. It was previously announced it will be $4 billion. These two actions are likely to increase the company’s stock price in the months to follow: Job cuts could boost the company’s operating profitability while the buyback program could lead to higher demand for the company’s stock. In the meantime, the company is still struggling as its profitability continues to dwindle.  

A fall in Profitability

According to the company’s financial reports, among the company’s five business segments grooming remained its most profitable in terms of operating profitability. On the other hand, in most of the company’s segments the profitability has declined in the recent quarter. The sharpest fall was in the Beauty products segment that reached only 11.3% profitability compared to 18.4% in the same quarter in 2011. The Baby Care and Family Care segment was the only one of the company’s business segments that edged up during the last quarter. The table below breaks down the changes in the company’s operating profitability in all five segments in recent quarters.

<img src="/media/images/user_12845/procter-gambleoperating-profitability-by-segment_large.jpg" />

The reasons for the company’s drop in profitability were mostly due an adverse effect of changes in the foreign exchange rates and a decline in volume sold in several segments (except Baby Care, Family Care, Fabric Care and Home Care segments).

The shifts in the currencies markets are most likely to main reason for the company's fall in revenues and profitability. Moreover, if the changes in foreign exchange rates will continue to be unfavorable in the months to follow this could adversely affect the company’s profitability and growth in revenues.

In certain segments the company's decision to raise prices pulled down the volume sold. The company raised the prices in all segments by an average of 2%. Despite the price increase, the total volume sold remained virtually unchanged. This finding suggests the demand elasticity for the company's products is less than -1. Moreover, the company has more room to raise prices in the future without adversely affecting its revenues. Let’s see how did the company perform compared to market and its competition. 

Procter & Gamble Continues to under perform the Market

Share of the company continue to under-perform the S&P500: shares have increased by only 5.8% (year-to-end); in comparison, the S&P500 rose by 10.9%. Part of the rise of the company’s stock could have been due to the back-wind support of the rise in the markets. Moreover, the linear correlation between the changes in the S&P500 index and the company's stock has strengthened in recent weeks as it has reached 0.85 during November. This strong relation suggests, under certain assumptions (including linearity of the relation and normality of data), that nearly 72% of the company’s stock movement could be attributed to the shifts in the S&P500 index. Thus, if the stock markets will dwindle in the weeks to come this could also pull down P&G’s stock. In the chart below are the normalized prices, as of the beginning of January 2012, of the S&P500 index and P&G.

<img src="/media/images/user_12845/png-snp500-nov_large.jpg" />

In terms of divided yield, the company is currently in the middle of the pack compared to other leading companies in the industry; the company recently paid a quarterly dividend of $0.56 per share, which comes to an annual dividend yield of 3.23%. In comparison Kimberly-Clark (NYSE: KMB) paid a quarterly dividend of $0.74 per share, which is an annual yield of 3.49%; Colgate-Palmolive Company (NYSE: CL) issued a quarterly dividend of $0.62 per share, which is an annual yield of 2.33%.

I suspect the company could show some signs of recovery in the stock market in the months to follow but it will continue to struggle in showing sustainable growth in revenues. The main uncertainty will be the foreign exchange effect on revenues. If the changes in foreign exchange will remain unfavorable, this could pull down revenues. Conversely, the company's price elasticity suggests if Procter & Gamble will continue to raise prices, revenues won’t suffer.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

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