With over 170 years of "touching lives and improving life
across the globe, Procter & Gamble (
) continues to provide consumers with quality beauty and personal
care products. Headquartered in Cincinnati, P&G draws around
41% of its sales from North America with Western Europe
contributing another 21% to its total sales. P&G competes with
), Colgate-Palmolive (
) and is one of the stocks that scores the best in our cash
conversion analysis included below.
P&G is heavily exposed to developing markets, which now
contributes close to 32% of its business. With new CEO, Robert
McDonald's, ambitious plan of acquiring a billion new consumers by
2014-15, we can only expect P&G's presence to increase in the
emerging markets of China and India growing at double-digit growth
We currently have a $75.25 valuation for P&G's stock which
is just around 20% higher than the current market price.
Cash is King - and Leads to Returns
For most investors, what matters is how much cash he or she
makes from a stock, which includes both dividends and stock
appreciation. We have analyzed the cash position at P&G and
compared it with its peers in the beauty and personal care
Here we've examined three parameters: (i) the cash conversion
ratio (measured by free cash flows % total revenues), (ii)
dividends to free cash flows ratio (cash dividends as a % free cash
flows) and (iii) revenue growth projections (2010-15 CAGR) to
evaluate our estimates of the cash position in the leading players
in the beauty and personal care industry.
P&G is a Cash Cow
P&G has an impressive cash conversion ratio (free cash flows
as a percentage of sales) of 14% vs. its peers. The cash conversion
ratio shows how efficiently a company converts sales to cash and
implicitly captures operational efficiencies. P&G is the
largest consumer goods company in the world and the economies of
scale can be partly attributed to the high operating margins.
Many investors take the dividend policy into consideration while
investing in a stock, particularly of stable and mature companies.
The company could be generating cash but investors like to see the
management distribute this cash to the shareholders or plow it back
into the business, which should then appear in higher growth.
Here again, P&G maintains a healthy dividend payout ratio
and pays its shareholders almost 48% of its free cash flows by our
estimates. We are a little conservative with regards to P&G's
revenue growth forecasts at around 4% predominantly on account of
the increasing proportion of volumes coming from emerging markets,
behind lower priced product variants.
See our full estimates for
P&G's Improving Cash Position
P&G's overall cash position has improved in 2010 with net
debt /cash rising to 1.5 and debt coverage ratio (EBITDA/interest
payment due on outstanding debt) rising to historically high levels
of almost 23 in 2010. While P&G's closest competitor, Unilever
has been on an acquisition spree lately with its recent acquisition
of Sara Lee's personal care and European laundry business and its
purchase of Alberto-Culver, we believe P&G could look to make
acquisitions to help boost growth in emerging markets where it is