There are not many companies which are as steady and dependable as Procter & Gamble (PG). One look at its history will tell you this. The company was founded in 1837, and already had $1 million in sales by 1859. During the civil war, the company's soap and candles became a household name to Union army soldiers stationed all over the country. Think about this for a moment - how many other companies do you know existing today that had $1 million in sales in 1859? (about $28 million in today's dollars). Don't stress your brain on this one, but I can assure that it is very few. Even Coca-Cola (KO) wasn't introduced until 1886. Of course over the years, P&G has branched out into many other consumer goods product categories, beyond just soap and candles, including the mega-merger with Gillette in 2005.
P&G is the kind of company which you should always keep on your watchlist in times of market turmoil. Recently I read an article where it was talking about the legendary value investor Sir John Templeton, and how he always kept a list of companies that he would buy during times of economic recession and general market downturns. By deciding this in advance, you also have a plan of action to take when the going gets tough, and you let logic and reason dictate your actions instead of panic stricken emotions. I think this is great advice for any investor, and I also keep a short list of a few "no brainer" companies, which have been around forever, products are household names, and are not too cyclical.
Here are 5 reasons why I think P&G should remain on your watchlist:
- Brand Moat - Who hasn't heard of Head & Shoulders, Crest Toothpaste, Gillette razors, and Pampers? P&G boasts 25 billion dollar brands, according to the latest 10-K. They have 70% global market share in men's razors and grooming products, and more than 25% share in the very competitive home health care and baby care product lines. Pampers account for more than $10 billion in sales annually. With all of these well known and diverse product lines, P&G has built several franchise brands which will not go away anytime soon. One remark Warren Buffett used to make about owning millions of share of Gillette stock: "I could go to bed easily at night knowing that the next morning several billion males around the world would need to shave".
- Growth Prospects Remain Bright in Emerging Markets - This report from McKinsey & Company highlights how strong the growth prospects remain for emerging market consumption. Over 5 billion of the world's people, more than 70% of the population, live in countries where the GDP per capita is $1000 dollars a year or less. In the next few decades the collective purchasing power of these consumers will overtake that of developed markets. For a moment just think about it - as these consumers rise into the middle classes, what are they more likely to spend money on - iPads and iPhones - or hair products and other practical consumer goods from P&G? Although I don't doubt the growth of electronics in general, I think for sure its clear that P&G and other similar consumer goods companies will have a lot of growth ahead in the developing world.
- Solid Dividend Growth - P&G currently has a dividend yield around 3.3%. The company has raised payouts consistently without ever decreasing the dividend since 1970 - more than 40 years. From 0.01/share in 1970 to 0.56/share, that is a whopping 5,500% increase or a CAGR of 10%. Buying just a few shares in 1970 and re-investing all those dividends would have paid off handsomely - not to mention the stock has increased from about 5$/share to near $70/share today!
- Predictable, Non-Cyclical Business - P&G is not the kind of business you need to worry about from one quarter to the next and how it will fair in the next economic cycle. With only a few bumps in the road, the company has increased earnings relatively predictably from $1.85/share in 2003 to $3.12/share in 2012. This is a CAGR rate of about 5%. Certainly not a fast growing business, but for sure very steady. In 2009 at the height of the great recession, sales only dropped 4% from the preceding year.
- Decent Balance Sheet - Although P&G doesn't have a fantastic balance sheet, it is by no means in any financial trouble. Outstanding debt is $21B, down from a high of $36B in 2006 after the purchase of Gillette. Debt/Equity ratio stands at 0.50, and the interest coverage over 17. With such stable cash flows, I see very minor risks to this capital structure.
When to Buy?
As the title of this article suggests, I don't advocate buying P&G shares today. Although I feel it is a great company with an incredible economic moat built around its household brand names, the fact remains that you should not buy a company at any price. By most accounts, I would say that P&G is fairly valued today at $65.59/share. With a forward P/E over 16, and an EV/EBITDA over 11, I wouldn't call the company particularly cheap. Using this simple fair value calculator from GuruFocus, you could even make the case the company is slightly overvalued. Knowing that P&G has such a stable business, you should therefore look to buy in if the shares ever take an unwarranted drop in price completely unjustified by the numbers. For example in 2009, the shares dropped nearly 30%, even though earnings and sales were off significantly less. Also the stock has a beta of only 0.27, so you know that if it drops more than 20% in a short time period its very likely unjustified. Of course you might say to yourself that these kind of recessions don't happen often, so the amount of chances to buy P&G at a truly undervalued price are few and far between. This maybe true, but I can guarantee you that the next opportunity when this occurs, even if its several years from now you will feel confident in knowing that during times of trouble you have a dependable company you can feel confident in investing in.