Look to This Stock for Steady Returns
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A company that sells its products every day to millions of consumers, regardless of the prevailing economic conditions, deserves a place in every investor’s portfolio. Procter & Gamble (NYSE: PG) is just that type of company, and can provide a much needed dose of stability to all equity investors. Last year the company celebrated its 175th anniversary. With a portfolio of market-leading brands and a great dividend, P&G should be on the shopping list of nearly every investor.
Procter and Gamble directs investors’ collective attention to its 50 ‘Leadership Brands,’ meaning the 50 products that comprise 90 percent of the company’s revenues and more than 90 percent of its profits. Twenty-five of these brands are billion-dollar brands, each generating at least $1 billion in annual sales. Its flagship brands can be found in virtually every aisle in the local grocery store. These include Gillette razors, Pampers diapers, Bounty paper towels, Tide laundry detergent, Crest toothpaste, and Head and Shoulders shampoo.
The company competes with Colgate-Palmolive (NYSE: CL) and Clorox (NYSE: CLX) in the consumer staples sector. Procter and Gamble is the largest company of the three by far. With a market capitalization of $188 billion, P&G has a greater market value than both competitors combined. Colgate-Palmolive’s market cap is $50 billion, and its brands include its namesake toothpaste and dish soap. Clorox is a much smaller competitor, with a market cap of roughly $10 billion. Clorox relies primarily on its Clorox bleach, but also has a diversified product portfolio.
The strength of Procter and Gamble’s brands have provided the company remarkably consistent financial results. P&G announced fiscal 2012 sales of just north of $83 billion, an increase in total revenues of more than 3 percent year over year. The company’s earnings per share actually fell in 2012, to $3.66 per share from $3.93 the year prior. The primary reason for this was a shrinking profit margin. Even though sales increased, greater increases in input costs led to lower earnings for Procter and Gamble. However, it’s worth noting that commodity costs fluctuate, and the company is currently implementing a $10 billion cost-savings program to manage costs more effectively in the future.
Dividends and Buybacks
The beauty of a company like Procter and Gamble is the combination of a stable business and commitment to rewarding shareholders. In fiscal 2012 Procter and Gamble returned $10 billion to shareholders through dividends and buybacks. The company is the gold standard for dividend payers—in fiscal 2012, the company paid a dividend for the 122nd year in a row. That kind of track record places Procter and Gamble in elite company. Only eight other U.S.-based companies have paid dividends to shareholders for as long as Proctor and Gamble has. In addition, P&G increased its dividend for the 56th year in a row.
With a company like Procter and Gamble, an investor might consider a business model of laundry detergent, toothpaste and paper towels as too boring. But in a tumultuous global economic environment, boring is good. Over the last three years, global markets have been rattled by a seemingly never-ending string of worries. The unraveling debt crisis in Europe and the fiscal cliff in the United States have resulted in extreme volatility in the capital markets. However, since 2010 Procter and Gamble has traded between $60 and $70 per share. Investors can take comfort in the fact that the company isn’t going to disappear any time soon and that those dividend checks will keep coming in, no matter how tenuous the global economy might look.
The Bottom Line
Procter and Gamble isn’t the screaming value it was during the depths of the 2008 recession. That being said, it’s far from expensive, especially when compared to its peers. P&G currently trades for a trailing twelve-month P/E multiple of 18 and a price-to-book multiple of 3. Those numbers are almost identical to Clorox’s valuation, while Colgate-Palmolive trades at a trailing P/E of over 21. P&G provides investors with a dividend yield north of 3 percent and a reliable business model. The company should return to growing earnings in the near future, and the multiple has room to expand. Premium businesses deserve premium valuations, and as Warren Buffett famously said, it’s far better to own a wonderful company at a fair price than a fair company at a wonderful price.
Robert Ciura owns shares of The Procter & Gamble Company. The Motley Fool owns shares of The Clorox Company. Motley Fool newsletter services recommend The Procter & Gamble 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!