Procter Doesn't Gamble (PG)
By Adil Yousuf
With the nervous jitters in the markets this week, one might start to wonder if investor actions are signalling that there is trouble ahead. Though U.S. equities look promising due to the strong performance in Q11, unexpected earnings disappointment, increase in unemployment, or an early end to quantitative easing could send the market lower for a healthy correction.
It's hard to resist the urge to dump stocks when the market goes south. But there are always stocks worth holding during such times because they're likely to reward over the long run.
Procter & Gamble (PG) is a company that perfectly fits the profile for a long-term investment. It may not be the best company for investors looking for high immediate capital gains, but the company promises to be a stable long-term investment that will pay increasing dividends for years to come. The company has increased dividend every year for 56 consecutive years with its current dividend yield at 2.9%.
The company owns a strong portfolio of leading brands that span a broad range of product categories - household care, beauty, grooming, and personal healthcare. Many of these products are every day necessities, not luxuries that people cut quickly from their budget when economic situation looks uncertain.
The company has been making efforts in increasing its global footprint as well, particularly emphasizing on emerging markets 2 that now contribute to 38% of sales.
The company is widely recognized as one of the world's most innovative corporations. Management has promised to deliberate refocus on "discontinuous innovation" to increase its sales and margins. Procter & Gamble describes discontinuous innovation as "innovation that obsoletes current products and creates new categories and new brands". Tide pods, Swiffer, and Crest Whitestrips are some examples of big product wins in recent years.
Cost saving is one of the most focused long term goal for the company. Management has outlined a productivity program with the objective of delivering $10 billion in cost savings by fiscal 2016 3 . The cost restructuring plan has been working well for the company and will be a key factor in determining earnings growth in the upcoming quarters.
For fiscal Q2 2013, the company earned $1.22 per share surpassing consensus analyst expectations by 11 cents. Net income jumped 144% to $1.39 a share, from 56 cents a year earlier. Net earnings were boosted by productivity savings in all business segments except health care, where Procter & Gamble made extra investments to enhance supply chain and ramp up marketing in emerging markets.
The company also increased revenue by 2%, generating $22.18 billion. Revenue growth was relatively consistent across all product lines - Grooming (2%), Beauty (3%), Fabric/Home Care (3%), Healthcare (4%), and Family Care (5%).
Overall, the results were strong which led to the company raise Earnings and sales guidance for the year 4. The company also tossed another $1 billion into its share repurchase bucket, saying that it now plans to buy back $5 to $6 billion of its stock - this indicates that management is confident in their operations and future prospects for the business.
Based on Market IQ's proprietary Fundamental metrics, Procter & Gamble is expected to Outperform its peer group.Market IQ places Procter & Gamble in the top right quadrant of the Quality - Value chart (see below), indicating high Quality and Investment Value.
Procter & Gamble's Qualitative strength can be seen in multiple areas, such as its earnings growth and Financial Strength.
- Over the trailing 12 months Procter & Gamble has been able to increase its earnings by 27.8% which compares favourably to the average increase of 13.3% in earnings for its peers.
- Procter & Gamble exhibits solid financial strength compared to its peers. Equity to Debt ratio of 1.32 is significantly greater than the industry average of 0.52.
In the consumer staples sector, Procter & Gamble is attractively priced and offers compelling Valuation metrics.
Additionally, Market IQ's Relative Risk metrics suggest that Procter & Gamble is likely to provide a smoother ride in terms of price volatility especially during turbulent times. High market Capitalization, historically stable earnings variability, cheap Valuation metrics, and insensitivity to business cycles and credit spreads make Procter & Gamble less risky relative to other companies.
An immaculate track record of increasing dividends makes Procter & Gamble the right fit for income investors. Additionally, with the company's product growth, cost management, and continued development overseas, investors are likely to benefit from steady capital gains in the years to come.
1 The S & P 500 Index gained 10.5% in Q1 2013.
2 Management has launched an initiative to double its presence in emerging markets with new facilities in countries like China, Brazil, Nigeria, and Indonesia.
3 The productivity plan includes $6 billion of savings in cost of goods sold, $ 3 billion from non-manufacturing headcount, and $1 billion from marketing efficiencies.
4 Procter & Gamble expects fiscal 2013 core earnings of $3.97 to $4.07 per share, up from an earlier forecast of $3.80 to $4. Analyst estimates were at the bottom of that new range.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.