Just Buy This 15% Yielder

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Procter & Gamble (NYSE: PG) is an American consumer goods company with products that include pet foods, cleaning agents and personal care products.

Procter & Gamble’s Earnings

P&G beat the analysts’ estimates in 2Q 2013 and reported earnings per share of $1.39; guidance range was $1.18 to $1.25 per share. Core earnings per share grew 12% to $1.22, while core operating income was up 0.11%. Core gross margin also increased by 0.11%, thanks to cost savings and higher productivity. The free cash flow stood at $3.1 billion in the quarter, which also beat the company’s estimates. Out of this, $1.6 billion was used up in dividends while $1.4 billion was spent in share repurchases.

In the U.S. laundry detergents division, the Gain and Tide brands have done really well. Tide’s market share was up 1.5% from the prior year, while Gain's share was close to 15%. The auto dishwashing detergents have also shown a significant growth during the past year, as Cascade's market share has risen 1.5% to 60%. Gillette’s market share also grew 2% to 74% in the U.S. blades and razors segment. The Fusion franchise has gone up more than 1% to 37.5%, while the MACH3 enjoys a healthy 21% market share.

In the developing markets, organic sales were up 7% during the latest quarter. The BRIC markets grew by 11%, with India and Brazil yielding a growth of 20%. One of the key developments in this region was the expansion of the company's oral care portfolio. Over the last 4 years, P&G has expanded its oral care portfolio to 34 countries. Oral care shipments grew more than 50% in 2Q13 amid the launch of 3D white toothpastes. Moreover, the company has plans of launching its oral care in Australia this year. Gillette’s latest breakthrough, Gillette Guard, has shown a lot of promise in India and Egypt lately; the company has further plans of testing it in other developing markets where the double-edge blades are still the way to go.

Valuation

Procter & Gamble is trading at a forward P/E (1yr) of 17.29x and has a mean recommendation of 2.2 on the sell side. Using the industry’s earnings multiple of 15.6x, we can value P&G’s stock. However, as P&G is expected to perform well above its industry, we would value it using a premium of 20%. Hence, a forward P/E (1yr) of 18.72x would be used.

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According to high estimates, we value P&G at $85.18, depicting an upside potential of almost 12%. Incorporating a dividend yield of 3% into this yields a total return of 15%. In short, P&G is one of the top buys in its industry, if not the best. 

Industry

P&G’s biggest rival, Unilever (NYSE: UL), recently released its 2012 earnings. The company’s revenues were up 10.5% to €51.3 billion. Earnings per share grew 5% to €5.14, while the core earnings per share were up to €1.57, thanks to high levels of operational efficiency. While the Americas grew by 7.9%, Europe saw a growth of almost 0.8%. Home care segment grew by 10.3% whereas the Personal Care segment saw a growth of 10%. Unilever is trading at a forward P/E (1yr) of 17.28x, has a PEG of 3.46, and a mean recommendation of 2.3 on the sell side. This suggests that though the company is doing great, its stock is still rather expensive when compared to P&G. In short, it’s a good buy but not as attractive as P&G.

On the other hand, Colgate-Palmolive (NYSE: CL) released its 4Q 2012 earnings on the Jan. 31. Organic sales grew 4% in the North American region, and market share was up in at least 7 segments. Toothpaste share increased 1%, which is the largest in the last 10 years. In the toothpaste category, new products like Colgate Total Zx Pro-Shield Plus Sensitivity and Colgate Optic White Dual Action are all set to do pretty well in the coming years. Furthermore, the company is also excited about its new toothbrush, Colgate 360 Total Advanced Floss Tip.  Apart from oral care, Colgate-Palmolive has full range of products lined up in personal and household care. Colgate-Palmolive is currently trading at a forward P/E (1yr) of 16.87x and a mean recommendation of 2.6 on the sell side. Moreover, it’s yielding a dividend of 2.30%. In short, just like Unilever, Colgate-Palmolive is a good buy but isn’t that attractive as P&G.

Conclusion

Thanks to its hugely diversified portfolio, the fast moving consumer goods’ sector has largely remained a non cyclical sector in the past. The same thing happened in 2012 as the global economy continued to shrink but the consumer sector outperformed other sectors. As a result, the three big market players enjoyed a significant chunk of profits.  The good news for P&G came from the emerging markets where it continued to capture huge market share, whether it was the household or the personal care segment. 2013 won’t be that different either, as the company plans on investing more into the BRIC nations. The bottom line is that Procter and Gamble will continue to outperform its peers in the years ahead; hence, it remains the top buy in the FMCG sector. In short, we recommend buying P&G for a yield of at least 15%.


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. 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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