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Procter & Gamble's Pricing Power Is Stronger Than Ever

In addition to causing terrible health consequences, the coronavirus pandemic is snarling supply chains worldwide. On the other hand, consumer demand has been resilient, and concentrated on fewer available goods and services.

So, as usual, decreasing supply and increasing demand have led to rising inflation. To combat these additional costs, Procter & Gamble (NYSE: PG) and many other businesses have raised prices on their products. Fortunately for P&G shareholders, consumers are not balking at the increases.

A person in mask shopping for cleaning products.

Image source: Getty Images.

P&G raised its sales outlook for 2022

When Procter & Gamble reported its fiscal 2022 third-quarter earnings on April 20, it told investors that inflationary pressure would cost the company $3.2 billion for its fiscal 2022. The figure was a $400 million increase from the estimate it had given investors in January. Such is the magnitude and the speed of inflation ripping through economies worldwide.

Despite these increases, P&G reiterated its target earnings per share for 2022. The company is offsetting these higher costs by passing them along to consumers. As a result, it upgraded its annual sales growth guidance from a midpoint of 3.5% to a midpoint of 4.5%.

PG Revenue (Quarterly YoY Growth) Chart

PG Revenue (Quarterly YoY Growth) data by YCharts

In its most recent quarter, which ended on March 31, P&G reported sales growth of 7%. The increase was primarily a result of higher prices consumers are paying for its products. Procter & Gamble has implemented price hikes across all its categories. Management was pleasantly surprised at how well customers are taking the recent hikes.

At an investor conference on May 20, Procter & Gamble CFO Andre Schulten said:

We know the pricing we've taken, and we know that the elasticities that we're seeing in the market are better than what we would have expected based on historical data. That continues to hold in the U.S. about 20% to 30% better price elasticity. I spent a week with our CEO in Europe a couple of weeks ago, and it holds in Europe as well.

Price elasticity refers to the idea that consumers purchase fewer units when the price per unit goes up. So perhaps customers are purchasing fewer units than they otherwise would if P&G did not increase prices, but that fall in units purchased is more minor in magnitude than at other times when P&G has raised prices. In other words, Procter & Gamble's pricing power is stronger than ever.

What this could mean for investors

Procter & Gamble's strong performance amid a volatile macroeconomic backdrop could partly explain why its stock is getting more expensive when measured by its price-to-free cash flow multiple. However, it has come down slightly off of its recent highs. Another explanation could be investors flocking to consumer staple stocks after turning away from unprofitable growth stocks.

PG PE Ratio Chart

PG PE Ratio data by YCharts

Regardless, P&G has earned the valuation bump. Its solid execution and demonstrated pricing power are desired characteristics of an investment in the current economic scenario.

The company has indicated it has more price increases planned, and there is no telling if the consumer response will be similar. If P&G's stock falls amid the broader sell-off, investors may consider adding it to their portfolios.

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Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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