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Dow 30 Profile: Procter & Gamble
In 1837, at the insistence of their father-in-law, William Procter and James Gamble joined forces to launch a new candle and soap business. Despite a challenging economic climate—there was a financial panic that year, which doomed the re-election prospects of President Martin VanBuren—the company continued to expand and develop, and in just over two decades, it recorded $1 million in sales. From there, Procter & Gamble (PG - Free Procter & Gamble Report) began to invest more and more into the business, developing one of the nation’s first research laboratories, while increasing advertising spending as new media outlets arrived. Product development and advertising would quickly become the foundation for P&G’s business model. Behind its innovation, the company continued to launch a plethora of new products, from razors to toothpaste to laundry detergent. And with a heightened focus on marketing, it would sow the seeds for the revolution of daytime television, sponsoring “soap operas” on the radio.
P&G continued to develop and acquire new brands, many of which would become household names, on the strength of one of the corporate world’s largest advertising budgets. At the same time, the company maintained a global focus. Its international business began with a small Mexican operation, followed soon by similar set ups in Europe and Asia. The overseas segment is no longer small potatoes, however, as it accounted for over 65% of P&G’s total sales as of June, 2012.
Procter & Gamble operates five product segments, Beauty, Grooming, Health Care, Fabric Care & Home Care, and Baby Care & Family Care. Each division contributes about one-third to the company’s total sales.
The Beauty & Grooming segments’ lineup consists of over 45 brands, with some of the most notable being added through acquisitions. Indeed, the company built its cosmetics and fragrances business with a number of purchases, such as Max Factor and Ellen Betrix, and later through a merger with Gillette. Combined, the two segments accounted for 34% of total fiscal 2012 sales.
Much like the Beauty division, the Health segment (15% of fiscal 2012 sales) is also largely a product of acquisition. The additions of Norwich Eaton Pharmaceuticals and Richardson-Vicks enabled P&G to jump into the fast-growing market for healthcare products in the late 1980s. The company owns about 25 global brands here, including high-profile names such as Crest, Pepto Bismol, and Vicks.
Fabric Care and Home Care, meanwhile, houses about 40 brands, and was responsible for about 32% of net sales in fiscal 2012. The launch of Tide laundry detergent helped P&G build their name beyond soap in the early years.
Finally, the Baby Care and Family Care division, which accounted for 19% of net sales in fiscal 2012, includes such well-known brand names as Bounty, Charmin, and Pampers.
P&G continues to be an industry leader in product development, which is critical, given the crowded store shelves in many of these spaces. The company prides itself on investing, on average, double that of most of its competitors on innovation. In fiscal 2012 (ended June 30th) alone, P&G spent just over $2 billion on research and development.
In turn, innovation should continue to be a primary catalyst to top-line growth in the short and long term. The company consistently maintains a strong new product pipeline, and the coming years should see a vast number of rollouts across the globe.
The strength of new product development is also vital to margin expansion. With the growing number of brand-name and private-label items on the market now, competitive pricing pressures ought to persist. P&G’s ability to drive the industry’s innovation, however, should enable it to sustain pricing power regardless of the market environment. As a result, margin expansion is likely in the cards over the coming years.
The Brand Support
In addition to innovation, the other driving force behind P&G’s success is the brand-name power of its lineup. The primary reason the company boasts such well-known names is its commitment to brand support through marketing and advertising. Consumer research is a key part of the marketing strategy, so much so that P&G spends $350 million annually on customer surveys and studies.
At the same time, the company has historically been one of the pioneers in the advertising world. It was the first to advertise directly to consumers on a national scale, and it receives credit for creating the soap opera concept through its early radio sponsorship. Today, advertising is an even more important part of P&G’s growth strategy, as it is now targeting customers in all corners of the world. And this is clearly reflected in the company’s budget. From fiscal 2010-2012, P&G spent an average $9.0 billion annually on advertising, not including promotions and sampling activity.
Although this is a hefty sum to spend, it is also largely the reason why P&G products continue to reach more and more households every year. By 2015, the company hopes to have a loyal base of five billion consumers, up from the current 4.6 billion it serves on this planet of 7.0 billion. Though lofty, this goal seems achievable given the recent rate of growth.
And this is not to say that P&G’s wallet is always open. Rather, the company has ramped up its efforts to improve productivity, which includes using its scale more effectively to allocate resources. Internal cost reduction initiatives should also help enhance profitability over the long haul.
The Global Opportunity
Hand in hand with the aggressive advertising and R&D is the continued expansion of the company’s international presence. As of last fiscal year, P&G competed in 38 global product categories, however, it does not own a presence in every segment in its primary markets. Indeed, the company intends to remedy this by increasing its product lineup and focusing on the untapped country sectors.
This provides a sizable opportunity, as P&G recently indicated that it only competes in less than half of the country/category combinations in its top 50 markets. China and India are two obvious targets, given the size and speed of growth in both nations, and recent successes include Crest products in the former country and Tide in the latter. But the growth initiative is widespread, reaching into regions such as Latin America and Africa, as well. A perfect product example is the Braun CoolTec, the world’s first dry shaver with an integrated cooling bar, which is scheduled to rollout globally in mid-2013.
The Cost Savings Culture
In February 2012, Procter & Gamble rolled out a five-year, $10 billion cost saving initiative which is based on:
1) The reduction of overhead spending, which includes the elimination of roughly 5,700 non-manufacturing overhead positions by the end of fiscal 2013.
2) Annual savings planned in cost of goods across raw materials, manufacturing, and transportation and warehousing expenses.
3) Generating efficiencies which should allow P&G to grow marketing costs at a slower rate than sales growth which still increasing consumer reach and effectiveness, which should result in saving about $1 billion over the five-year period.
P&G has size and scale in what is already one of the more-defensive industries. The company’s finances are excellent, with a healthy cash balance and stable cash flow generation, garnering it an A++ Financial Strength rating. Moreover, P&G continues to maintain a focus on stockholder returns. The company is apt to utilize funds for share repurchases, and its dividend is a model of consistency. Indeed, shareholders have been treated to a cash distribution for 122 consecutive years, with the most recent being the 56th consecutive year the dividend has been increased.
In all, these shares are a blue-chip, stable investment, holding our Highest Safety rank (1). Although long-term growth is likely to be moderate, investors will probably not be subject to much surprise along the way. In fact, the issue receives perfect scores for Price Stability and Earnings Predictability. Investors can instead count on slow, but steady price appreciation, coupled with an above average dividend yield.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.