Why I’m In Procter & Gamble Co for the Long Run
October 17, 2019
Up 72% on Procter & Gamble Co, With More Upside Ahead
If only all of my stocks produced returns like Procter & Gamble Co (NYSE:PG).
I featured PG stock in my paid advisory Automated Income in April 2015. Since then, shares of the consumer products giant have produced a total return of more than 72%, including dividends. That compares with a return of about 39% from the broader S&P 500 over the same time frame.
You might think that, after a 72% run in a few years, the easy money has been made. Some investors have even asked me about ringing the register and taking money off the table.
Of course, I can’t provide personal advice, but I’m happy to keep Procter & Gamble in our Automated Income model portfolio. And while I can’t predict where its shares will go over the next quarter or two, long-term investors will likely be well compensated for their patience.
In fairness, the company has faced problems. Lower prices and higher costs have hammered profit margins across the industry. New competitors, who have taken advantage of cheaper advertising on social media, have chipped away at Procter & Gamble Co’s market share.
P&G compounded these problems by expanding into too many countries and too many product lines. That left Procter & Gamble stock in investment purgatory for almost five years.
But management has addressed many of these issues. In 2015, CEO David Taylor announced plans to overhaul the company’s business by slashing costs, decentralizing business decisions, and trimming the company’s product portfolio.
In total, Taylor culled over 100 less-profitable brands from the company’s product mix. That freed up cash and energy for Procter & Gamble to invest in its better-performing businesses.
Those efforts have started to pay off.
In fiscal 2019, the company reported organic sales growth of seven percent. Gross profit margins jumped 270 basis points. Earnings per share, after stripping out the impact of a strong U.S. dollar, increased 15% year-over-year. (Source: “P&G Announces Fourth Quarter and Fiscal Year 2019 Results,” Procter & Gamble Co, July 30, 2019.)
Investors expect those kind of numbers from fast-growing tech stocks, not the world’s largest consumer products company.
These efforts have paid off for investors. Since early 2018, PG stock has nearly doubled in value.
And in April, management announced a four percent dividend bump, raising the yield on shares to 2.5%. That increase represented a sharp spike from the one- and two-percent distribution increases that company had delivered in previous years.
Chart courtesy of StockCharts.com
And this could be just the beginning.
P&G still has room to trim expenses by reducing overhead, lowering material costs, and boosting manufacturing efficiency. Conducting more marketing campaigns in-house has allowed executives to boost the return on investment for every dollar spent on advertising.
Innovative product ideas, such as starting a razor subscription business and applying the “Tide” brand to a chain for dry cleaners, could provide a boost to top-line sales in the future.
That should result in a growing income stream for shareholders.
Procter & Gamble Co has boosted its dividend every year for decades, so another bump next spring wouldn’t surprise anyone. The question now, however, comes down to how large the bump might be. Given the company’s accelerating earnings growth, we could see a distribution increase in the high single-digits.
If so, that would provide a big catalyst for the PG stock price.
