Procter & Gamble (PG – Free P&G Stock Report) has some of the most recognized brand names in the United States. Pampers, Tide, Bounty, Gillette, and Crest can be found in numerous U.S. homes. The company also has a worldwide presence, with sales in more than 180 countries. However, despite the company’s marketing muscle and the good reputation of its products, sales and earnings in recent quarters have not been good. The consumer products giant and Dow-30 component has made management changes and continues to take steps to effect a turnaround. So far, however, not everything the company has done has borne fruit.
The competitive environment is tough. P&G faces challenges from Kimberly-Clark (KMB), Colgate-Palmolive (CL) and other consumer products companies. The effects of this competition are especially acute when many of the world’s economies are either growing at a low pace or are in recession. (For example, Russia and Venezuela are weak spots.) In each of the past eight quarters, organic sales growth has been no more than 2%. Unfavorable foreign exchange trends have hurt, too. Moreover, expenses associated with the “cleanup” of P&G’s core portfolio of products, along with other transition costs, have hurt the bottom line.
Management is focusing on core products and core markets, and is willing to enter into transactions to further this goal. For example, in February the company completed the sale of Duracell batteries to Berkshire Hathaway (BRK/B). P&G has also agreed to sell 43 of its beauty brands to COTY in a deal expected to close in October. The company is using the proceeds toward its goal of paying dividends and buying back stock totaling up to $70 billion over a four-year period ending in fiscal 2019. (P&G’s fiscal year ends on June 30th.) Smaller brands have been sold, too. On the expense side, P&G is reducing the cost of goods sold through productivity improvements (it is ahead of schedule here), and is taking other steps, such as a reduction in the number of advertising agencies used, to become more efficient.
A look at the report on P&G in The Value Line Investment Survey indicates that the company’s results have been disappointing of late. The Quarterly Sales box displays nine consecutive negative year-to-year comparisons. The Quarterly Earnings box shows that the bottom line has worsened in six of the past seven interims. Moreover, we expect declines in each measure in the fourth period of fiscal 2016. As for annual results, the Statistical Array indicates that we estimate another year of lower income in fiscal 2016, followed by just a partial recovery in fiscal 2017.
The Price Chart shows a trend of declining relative strength since the midst of the last recession. Although the recent price (displayed in the Top Label) is near its high for calendar 2016, the High/Low ranges at the top of the Price Chart show this is still below the high prices established in each of the previous three years. The Top Label also indicates that the valuation of this equity is higher than in recent years. The relative price-earnings ratio of 1.27 means that P&G stock is trading at a market premium, in contrast to its usual multiple at (or just slightly above) the market median, as presented in the Array.
Despite the problems that P&G is experiencing, the stock still has some strong points. This issue carries a grade of 1 (Highest) for Safety, as can be viewed in the Ranks box. This is based on a combination of top-notch marks for Financial Strength and Price Stability, which are displayed in the Ratings box. The Capital Structure box indicates that interest coverage is very healthy. The Current Position box shows that P&G had more than $13 billion in cash as of March 31, 2016. Some of this cash is being returned to shareholders through dividends and stock buybacks. Indeed, the company boasts 59 years of consecutive dividend increases¬—a record that has been maintained, even during the recent span of bottom-line weakness. The Top Label displays a dividend yield slightly above 3%, which is superior to the market median.
All told, conservative, income-oriented investors are probably the only ones who might find P&G stock appealing at this time. The Ranks box indicates that the equity is not a standout for year-ahead relative performance (Timeliness: 3, Average). The Projections box suggests that 3- to 5-year total return potential is unspectacular, even on a risk-adjusted basis. In view of this, and the challenging business conditions P&G is facing, most investors can fare better elsewhere.