This famous maker of household goods has shed two-thirds of its brands to focus on its market leaders.
The company continues to benefit from a restructuring plan that has freed up cash for more research spending and new acquisitions. Earlier this year it purchased the consumer healthcare business of a major German pharmaceutical firm. This stock has paid a dividend every year since 1890 and has raised it for 62 consecutive years.
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PROCTER & GAMBLE CO. (New York symbol PG; www.pg.com)is one of the world’s largest makers of household and personal-care goods. It began operating in the U.S. in 1837 and now sells its products in over 180 countries. Overseas markets account for 56% of its total sales.
The company has five main business lines: fabric and home-care products such as Tide laundry detergent (32% of fiscal 2018 sales, 27% of earnings); baby, feminine and family-care goods, including Pampers diapers (27%, 23%); beauty items such as Head and Shoulders shampoo and Olay cosmetics (19%, 23%); health-care items such as Crest toothpaste (12%, 13%); and grooming products, including Gillette razors (10%, 14%). Walmart accounts for 15% of the company’s sales.
In the past few years, Procter has streamlined its operations, mainly by selling its less-important brands. It now has about 65 brands, down from 170 in 2013. That reduction included the company’s October 2016 sale of 41 beauty product brands to Coty Inc. (New York symbol COTY). Wella, Clairol, Max Factor and CoverGirl were among those brands.
Under the terms of the deal, Procter shareholders had the option of exchanging some or all of their shares for Coty shares. As a group, Procter investors now own 52% of the new Coty. Procter itself realized an after-tax gain of $5.3 billion on the transaction.
Due to its now-smaller size, Procter saw sales decline 12.6% from $74.4 billion in 2014 to $65.1 billion in 2017 (fiscal years end June 30). Sales then rose 2.7% to $66.8 billion in 2018. About 2% of that gain came from favourable exchange rates. Excluding the impact of currency and the sale of some smaller brands, Procter’s sales rose 1%.
Earnings from continuing operations fell 21.8%, from $3.63 a share (or a total of $10.7 billion) in 2014 to $2.84 a share (or $8.3 billion) in 2015. Earnings then rose to $3.49 a share (or $10.0 billion) in 2016, and reached $3.69 a share (or $10.2 billion) in 2017. Due to higher ingredient costs and advertising spending, earnings fell to $3.67 a share (or $9.9 billion) in fiscal 2018.
If you disregard all unusual items, earnings per share improved 7.7%, to $4.22 in 2018 from $3.92 in 2017.
Dividend stocks: Shift in advertising policy frees up cash for more research spending
A successful restructuring plan, which includes closing plants in North America and shifting production to larger facilities, also contributed to the improved earnings. That plan has cut the company’s annual costs by $3.3 billion.
Procter has also lowered its spending on advertising and marketing. It totalled $7.10 billion (or 10.6% of sales) in fiscal 2018. That’s down from $7.12 billion (or 10.9%) in 2017. The decrease is partly because the company continues to shift away from traditional TV and print ads to more effective online ads and in-store promotions.
Those savings are freeing up cash that Procter can use to develop innovative new products. In 2018, its research spending rose 1.8%, to $1.91 billion (or 2.9% of sales) from $1.87 billion (or 2.9%) in 2017.
In its fiscal 2019 first quarter, ended September 30, 2018, Procter’s sales rose just 0.2%, to $16.69 billion from $16.65 billion a year earlier. If you exclude the impact of negative exchange rates and acquisitions, sales gained 4%, mainly due to a 3% increase in volumes.
Overall earnings before unusual items fell 0.4%, to $2.92 billion from $2.93 billion. Procter spent $1.3 billion on share buybacks in the quarter. As a result, earnings per share rose 2.8%, to $1.12 from $1.09.
Procter recently agreed to pay $3.9 billion for the consumer health unit of Germany’s Merck KGaA. (Note, this firm is unrelated to U.S.-based drugmaker Merck & Co.)
Merck KGaA makes a wide variety of over-the-counter vitamins and other products that relieve muscle, joint and back pain, as well as the discomfort of colds and headaches. Top brands include Neurobion, Dolo-Neurobion, Femibion, Nasivin, Bion3, Seven Seas and Kytta.
Procter expects to complete the purchase before June 30, 2019. The Merck products look like a nice fit with the company’s existing consumer health products (such as Vicks cold remedies and Pepto Bismol heartburn relief). They’ll also add $1 billion to Procter’s annual sales.
The company can easily afford this purchase. As of September 30, 2018, it held cash and investments of $11.25 billion. Its long-term debt was $20.8 billion, or a low 10% of its market cap.
Procter recently increased its dividend by 4.0%; the new annual rate of $2.87 a share yields 3.1%. The company has paid dividends continuously since 1890 and has raised the annual rate each year for the past 62 years.
In fiscal 2018, Procter’s dividends totalled $7.3 billion. That’s a manageable 65% of its free cash flow (regular cash flow less capital expenditures) of $11.2 billion. It also means the company has room to keep increasing the payout and buy back its shares.
In fiscal 2019, Procter’s earnings should rise between 3% and 8% to $4.42 a share for the year. The stock, which has gained 27% in the past six months, trades at a reasonable 21.3 times that forecast.
Recommendation in Wall Street Stock Forecaster: Procter & Gamble is a buy.
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