P&G: Giant With Room To Grow

| About: The Procter (PG)

Procter & Gamble (NYSE:PG) is the largest consumer goods company on earth, with $84 billion in revenue and over $10 billion in net income. P&G's brands are valuable and diverse, with products in a variety of categories from household cleaning to hygiene. Procter & Gamble's name may not be well known to the public (but they are aggressively trying to change this), but their brands are recognized the world over. These include everyday household names such as Pampers, Gillette, Tide, Ariel, Downy, Pantene, Head & Shoulders, Olay, Oral-B, Crest, Dawn, and Always. Not only does P&G have an impressive size, but also a sound track record of financial performance.

(From P&G's 2012 Annual Report)

"Measuring from the end of each quarter starting in 1980, rolling 10-year returns have exceeded both the S&P 500 and the Dow Jones Industrial Average in 82 out of 88 periods, or 93% of the time."

P&G is a behemoth, and the very definition of blue chip. It's a solid consumer defensive stock that has continued to outperform the market again and again. Procter & Gamble has paid uninterrupted dividends over the last 122 years: one of a select group of nine companies able to make such a claim.

The major criticism against a company of this size is always its mobility. There is a perception that firms as large as P&G are too large to be nimble in the marketplace, make fast and aggressive decisions, and continue to provide a pattern of growth to shareholders. P&G has a strong international presence, particularly in the developing countries, which continue to provide avenues for growth. Developing markets account for 38% of P&G's sales, and this will only increase as time goes own. Procter & Gamble's geographic footprint has moved slightly from North America and Western Europe to Asia and Latin America. The softness in Europe contributed to weak sales figures in the region, as well as to a declining share of P&G Revenue. As the sovereign debt crisis continues to resolve, this figure should rebound with the rest of the European economy.

The continued weakness in developed markets was more than compensated for by growth elsewhere. Net sales increased from $81.1 billion to $83.7 billion from 2011 to 2012. Somewhat uncharacteristic of a company devoted to efficiency, cost of goods sold and selling, general and administrative expenses increased by $2.5 billion and $0.7 billion, respectively. These additional costs coupled with a one-off goodwill/intangible impairment charge of $1.6 billion ate away at operating income, reducing operating income year-over-year by $2.2 billion. Somewhat worryingly, this represents a decrease in operating margin from 19.1% to 15.9%. To me, this is not a sign of company weakness, but a slight susceptibility to macro-driven events. No fundamental weakness exists, especially given the company's large percentage of sales derived from the world's fastest growing markets. Once the macro situation picks up globally, P&G will have even further room to grow.

Procter & Gamble has had a spectacular year with 1 year returns of 19.8%. Such high growth from such a large, stable stock is indicative of a solid company with a great management team committed to shareholder value.

Disclosure: I am long PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Personal Products, Buyside Insight, Earnings
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