Procter and (Less) Gamble 17 comments
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In crazy markets like today’s, many investors have retreated to the safety of CDs, or treasury bills and notes to get a little yield while waiting out the economic perfect storm. With rates this low, however, those guaranteed returns are likely to insure that you will lose buying power after inflation and taxes.
Here’s a conservative play that could provide substantial total returns without (in my view) undue risk.
Procter & Gamble (PG) is a world leader in products that would seem relatively immune from demand destruction in all but the worst economic conditions. It makes detergents, soaps, toiletries, foods, paper products and industrial goods.
Revenues in FY 2009 (ends June 30, 2009) will likely come in at over $87 billion on sales of its major brands - Tide, Head and Shoulders, Pantene, Wella, Dawn, Always, Olay, Bounty, Charmin, Pampers, Gillette, Braun and others. Wal-Mart (WMT) accounts for about 15% of sales.
With a worldwide market and necessity type products PG seems well suited to continue its long term trend of higher sales and earnings. EPS have grown in each year since at least as far back as 1992 and the dividend has been increased in each of those years as well. The current consensus estimate for FY 2009 is now standing at $3.75 /share (excluding a non-recurring gain on the sale of Folgers) – up from $3.50 in FY 2008.
These are high quality shares. Value Line rates PG’s financial strength as ‘A++’ and assigns it to the 100th percentile in both ‘stock price stability’ and ‘earnings predictability’ [with 100th being best]. They also garner Value Line’s top safety rating to go with a super low 0.55 Beta.
Here are the per share numbers as reported by Value Line.
(FY 2009 data includes estimates for Q3 & Q4):
FY .….. Sales ….. C/F ….. EPS ….. Div….. B/V …. Avg. P/E
2002 … 15.47 …. 2.55 …. 1.80 …. 0.76 …. 4.64 …… 22.4x
2003 … 16.72 …. 2.82 …. 2.04 …. 0.82 …. 5.63 …… 21.6x
2004 … 20.21 …. 3.18 …. 2.32 …. 0.93 …. 6.19 …… 21.3x
2005 … 22.95 …. 3.51 …. 2.53 …. 1.03 …. 6.47 …… 21.5x
2006 … 21.46 …. 3.51 …. 2.92 …. 1.15 ….19.33 …... 21.5x
2007 … 24.42 …. 4.25 …. 3.04 …. 1.28 ….20.87 ……20.5x
2008 … 27.53 …. 4.97 …. 3.50 …. 1.45 ….22.46 ……18.6x
2009 … 29.45 …. 4.98 …. 3.75 …. 1.55 ….23.10 ……16.5x
If the numbers aren’t enough to convince you that Procter & Gamble looks good, perhaps you’ll be swayed by the fact that Berkshire Hathaway (BRK.A) owns about 3.55% of all outstanding shares.
At Friday’s quote of $51.09, Procter and Gamble shares trade at just 13.6x current FY estimates and < 12.5x FY 2010 expectations. That’s the lowest multiple on these shares decades. The current yield of 3.13% is even higher than buyers of PG shares received if they caught the exact low in the 2001 recession.
I’m looking for PG shares to return to at least 14 times the year ahead estimate of $4.11 for a target price of $57.54 or better by year end.
Here’s my play:
…………………………..…….. Cash Outlay ……. Cash Inflow
Buy 100 shares @ $51.09 ………….… $5,109
Sell 1 Jan. 2010 $55 call @ $4.30 ……………………………. $430
Sell 1 Jan. 2010 $55 put @ $8.80 …………………………….. $880
Net Cash Out-of-Pocket ……………… $3,799
On expiration date (Jan. 15, 2010):
If Procter & Gamble shares are $55 or higher (+ 8% from Friday’s price):
- Your $55 call will be exercised.
- You will sell your shares for $5,500.
- Your $55 put will expire worthless (a good thing for you as a seller).
- You will have collected three $40 dividends or $120.
- You will have no further option obligations.
You will have $5,620 for your original outlay of $3,799.
That’s a 47.9% best case total return (cash-on-cash) on shares that only needed to rise by 8% or more over the 11.25 months of this trade.
What’s the risk?
Should PG shares stay below $55, then you could be forced to buy an additional 100 shares of stock and to be liable for another $5,500 cash.
What’s your breakeven on this whole trade?
On the original 100 shares it’s the $51.09 purchase price less the $4.30 /share call premium = $46.79 /share.
On the put you sold it’s the $55 strike price less the $8.80 /share put premium = 46.20 /share.
Your break-even would be the average of those two prices = $46.50 /share.
As long as PG shares stay above $46.50 you’ll be in the black. A drop of up to 9% won’t hurt you while a gain of even 8% will bring almost a 48% total return in less than one year.
Nobody can guarantee that PG shares won’t be under $46.50 by January 2010. I can tell you, however, that PG hasn’t changed hands at that low a price since 2003 when EPS were $2.04 versus this year’s projected $3.75 and the dividend was $0.82 versus today’s $1.60 rate.
Disclosure: Author is long PG shares and short PG options.
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Based on the fact that Proctor and Gamble has virtually no inside shareholders (less than 1/20th of 1%) after its most recent share sell-offs, and the fact that PG's Balance Sheet is so over-padded with non-tangible assets such as so-called Goodwill and other "Intangibles" to the tune of almost $90 billion (yes, $90 billion), I suspect this is a company whose time is coming very close to a very big fall. After all, of what real value is a company with "net tangible assets" of almost $27 billion dollars in the red. In real terms, the book value of its shares is far less than nil. And I can't recall the last time that I saw goodwill sell for much on the auction block. Nonetheless, in my opinion, goodwill and other such intangibles, are more often than not, simply "ghosts" aimed at the naive who are unfortunately misled into believing that there is far more value in a company's assets than their "real" book numbers would otherwise suggest.
I have no position in in Proctor and Gamble, long or short.
Do you think Warren Buffett has bad judgement in his holding of a 3.55% stake in PG?
Do you believe he missed your observation about "goodwill"?
Perhaps you can teach the old man a few things about the right ways to evaluate companies.
If you want to steal PG consider selling January 2010 or 2011 puts at the $50 strike price.
The 2010 $50 put was about $6.20 and the 2011 was about $8.90 last Friday giving you break-even prices of $43.80 and $41.10 should you be 'put' between now and the expiration dates.
You'd only buy well under today's prices and get the interest on the float for up to 23 months on the 2011's if you write against marginable securities you're already holding in a non-IRA account.
On Feb 15 10:32 AM Paul Price wrote:
> Marcap,
>
> Do you think Warren Buffett has bad judgement in his holding of a
> 3.55% stake in PG?
>
> Do you believe he missed your observation about "goodwill"?
>
> Perhaps you can teach the old man a few things about the right ways
> to evaluate companies.
>
> Yes, Warren Buffet did make Billions of dollars from the stock market.
> But where do you think those Billions of dollars came from? Well
> let me tell you. Much of it came from the naive who lost their money
> to him. Remember, the entire stock market is little more than a gambling
> casino, except that unlike a gambling casino with a bank to fund
> wins and losses, in order for one person to win in the stock market
> (short of course being paid a divident by the company), another person
> must lose. It really is that simple. And until people come to realize
> and accept that fact, there will always be winners and losers (many
> more losers than winners), and financial messes such as the one we
> are now in.
>
Those of you who disagree with the above should really consider this, and then afterwards perhaps ask yourselves just what kind of human beings you really are.
Birkshire-Hathaway shares which are now trading at $88,140, traded for as high as $147,000 within the past 12 months. That means that in order for those shares to have traded at that amount, there would had to have been a transaction with both a seller and a buyer at that price level. Thus the seller received $147,000 per share in that transaction.
Since then however, the buyer has either lost a considerable amount on the share if he subsequently sold it for less than the $147,000 he paid for it, or else he now owns a share which is worth only $88,140. Either way he lost so that the original $147,000 seller could win. Which side of the transaction do you think Warren Buffet was on? Do you think he buys at $147,000 to sell at $88,140. Not likely. So who lost?
Survival of the fittest? Perhaps! But unfortunately, such a philosophy when it applies to human beings, lacks any sense of humanity. Everyone cannot win in this game. In order for one to win, another must lose. It really is that simple.
I am long P&G and have been for 15 years. FYI, P&G ESOP owns ~25% of the outstanding shares. So it has many insiders.
On Feb 15 10:18 AM Marcap wrote:
> I do not agree that Proctor and Gamble is a good investment. In fact,quite
> the contrary. I fail to see it maintaining it current extremely overinflated
> share price of $51.09.
>
> Based on the fact that Proctor and Gamble has virtually no inside
> shareholders (less than 1/20th of 1%) after its most recent share
> sell-offs, and the fact that PG's Balance Sheet is so over-padded
> with non-tangible assets such as so-called Goodwill and other "Intangibles"
> to the tune of almost $90 billion (yes, $90 billion), I suspect this
> is a company whose time is coming very close to a very big fall.
> After all, of what real value is a company with "net tangible assets"
> of almost $27 billion dollars in the red. In real terms, the book
> value of its shares is far less than nil. And I can't recall the
> last time that I saw goodwill sell for much on the auction block.
> Nonetheless, in my opinion, goodwill and other such intangibles,
> are more often than not, simply "ghosts" aimed at the naive who are
> unfortunately misled into believing that there is far more value
> in a company's assets than their "real" book numbers would otherwise
> suggest.
>
> I have no position in in Proctor and Gamble, long or short.
I've never been a great fan of goodwill and intangibles. Most of the time they have little worth and represent more of a sign that the company overpaid for its assets. In this case, however, they do have real value. Bounty, pampers, duracell, tide, crest are all household names. If PG were to sell one of them, the brand alone would command a high return. Witness the nice price PG sold Folger's. PG's goodwill and intangibles are valuable. PG's goodwill and intangibles only become quicksand if the brands lose their appeal to consumers. Rather, they dominate their markets bringing in a strong and reliable cash flow.
On Feb 15 10:48 AM Marcap wrote:
> Yes, Warren Buffet did make Billions of dollars from the stock market.
> But where do you think those Billions of dollars came from? Well
> let me tell you. Much of it came from the naive who lost their money
> to him. Remember, the entire stock market is little more than a gambling
> casino, except that unlike a gambling casino with a bank to fund
> wins and losses, in order for one person to win in the stock market
> (short of course being paid a divident by the company), another person
> must lose. It really is that simple. And until people come to realize
> and accept that fact, there will always be winners and losers (many
> more losers than winners), and financial messes such as the one we
> are now in.
>
> On Feb 15 10:32 AM Paul Price wrote:
i wanted to send this to you privately as it does not really have anything to do with PG, however, i was wondering if applying this same method to PAYX would be a good medium term play. i view PAYX as a great company going thru some headwinds at the moment. It has a great balance sheet and should be able to ride out the stressful storm. well, i was thinking either PAYX or ADP, however, the ROE of PAYX is better. Sorry for cluttering this blog with something not relevant to PG.
Please don't lie! Nowhere on this page did I spell Proctor incorrectly (Prcotor) as you have suggested.
On Feb 16 11:42 PM William Procter wrote:
> Marcap, interesting to see your view P&G, but hard to take seriously
> as you even fail to spell the company's name correctly: Procter &
> Gamble (correct spelling), and not Prcotor & Gamble. Bright one
> you are...
Yes, I did spell Procter incorrectly by using an "o" at the end instead of an "e". But in your haste to criticize me, you also incorrectly stated that I spelled it as "Prcotor" which I did not do.
Perhaps those who are not so perfect themselves should not be quite so ready to condemn others.
In any event, have a nice day!
On Feb 16 11:42 PM William Procter wrote:
> Marcap, interesting to see your view P&G, but hard to take seriously
> as you even fail to spell the company's name correctly: Procter &
> Gamble (correct spelling), and not Prcotor & Gamble. Bright one
> you are...
People have been "overpaying" for brand names like Tide instead of "Generic Store Brand" for years. Howvere, in this economy, store brands look likely to pick up some gains.