PROCTER & GAMBLE CO. $80 (New York symbol PG; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 2.7 billion; Market cap: $216.0 billion; Price-to-sales ratio: 2.8; Dividend yield: 3.0%; TSINetwork Rating: Above Average; www.pg.com) began operating in 1837 and is now one of the world’s largest makers of household and personal-care products. It has 25 different brands that each generate over $1 billion in annual sales.
The company has five main divisions: Fabric Care and Home Care products, such as Tide laundry detergent and Duracell batteries (32% of 2012 sales, 26% of earnings); Beauty goods like Olay cosmetics (24%, 22%); Baby Care and Family Care products, including Pampers diapers (19%, 19%); Health Care items such as Crest toothpaste (15%, 17%); and Grooming products, including Gillette razors (10%, 16%). Wal-Mart accounts for 14% of the company’s sales.
The recession cut Procter’s sales by 5.5%, from $83.5 billion in 2008 to $78.9 billion in 2009 (fiscal years end June 30). Sales recovered to $82.6 billion in 2011, and rose to $83.7 billion in 2012.
Earnings fell 9.3%, from $12.1 billion in 2008 to $10.9 billion in 2010. Procter is an aggressive buyer of its own shares. As a result, earnings per share fell at a slower pace of 3.0%, from $3.64 from $3.53. Earnings improved to $3.93 a share, or a total of $11.8 billion, in 2011.
Higher prices for raw materials and packaging cut Procter’s 2012 earnings to $3.85 a share, or $11.3 billion. The company also gets two-thirds of its sales from overseas, and the recent rise in the U.S. dollar has hurt contributions from its foreign businesses.
Taking on generic competitors
In February 2012, Procter announced a major restructuring plan that includes closing plants and laying off 5% of its workforce. The company expects severance and other related costs to total $3.5 billion over the next four years. However, these moves should lower its expenses by at least $10 billion over the same period.
The plan also includes dropping some less profitable brands. For example, Procter sold its snack-food business for $2.7 billion in May 2012.
Lower costs will give Procter more flexibility to cut its prices without hurting its profit margins. That will help the company compete with cheaper generic products.
The plan should also free up more cash for advertising and marketing. In fiscal 2012, the company spent $9.3 billion (11.2% of sales) on advertising, up 1.5% from 2011. It also spent $2.0 billion, or 2.4% of its sales, on developing new products, up 2.4% from 2011.
Procter is now starting to see the benefits of this restructuring, which should save it $700 million to $1 billion in fiscal 2013.
Restructuring savings boost profits
In its fiscal 2013 third quarter, which ended March 31, 2013, Procter’s earnings rose 6.4%, to $2.6 billion from $2.4 billion a year earlier. Earnings per share gained 8.6%, to $0.88 from $0.81, on fewer shares outstanding. If you disregard restructuring costs and other one-time items, earnings per share rose 5.3%, to $0.99 from $0.94.
Sales rose 2.0%, to $20.6 billion from $20.2 billion. If you exclude the negative impact of exchange rates, sales would have risen 3%.
Procter’s balance sheet remains sound. As of March 31, 2013, its long-term debt was $21.1 billion, or just 10% of its market cap. It also held cash of $5.9 billion, or $2.14 a share.
The company is using more of its cash to buy back shares. It now expects to repurchase $6 billion worth of its stock in fiscal 2013, up $1 billion from its earlier estimate.
As well, Procter recently raised its quarterly dividend by 7.0%, to $0.6015 a share from $0.562. The new annual rate of $2.41 yields 3.0%.
The stock has gained 24% in the past year and now trades at 20.0 times the $4.00 a share that Procter probably earned in fiscal 2013. Its 2014 earnings should rise to $4.28 a share, and the stock trades at 18.7 times that forecast.
These are high multiples for a slow-growing consumer products company. However, Procter’s strong brands cut its risk. They should also keep helping it increase its sales in fast-growing markets like Brazil. Right now, emerging markets supply just 40% of its sales, compared to over 50% for some of its major competitors.
Earnings could rise 50% by 2016
Higher sales and cost cuts could push up Procter’s earnings to $6.00 a share in fiscal 2016. The stock trades at a more reasonable 13.3 times that projection.
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