Procter & Gamble (PG), which is the world's leading household and personal care firm, still has a lot to offer in terms of long-term shareholder value creation. This article discusses the reasons to be bullish on P&G and consider fresh exposure to the stock on any meaningful market correction.
Just to put things into perspective, P&G has returned $88 billion of cash to shareholders in the last ten years through dividends and share repurchase. In terms of stock returns, 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. And rolling 20-year returns have exceeded both the S&P 500 and the Dow Jones Industrial Average in 46 out of 48 periods, or 96% of the time. For sure, the company has rewarded shareholders handsomely in the past.
The critical question at this point of time is - Can P&G create shareholder value in the same way over the next few years?
I do believe that the stock is a great investment and discussed below are some of the critical reasons for this conclusion.
The primary growth driver for P&G's business is population growth coupled with income growth. A strong presence in emerging markets can therefore prove beneficial for P&G as a relatively muted growth in developed markets can be offset by high growth in emerging markets. This has precisely been the trend for P&G in the last few years. The net sales contribution from North America has declined to 39% in 2012 from 42% in 2009. During the same period, the net sales contribution from Asia has increased to 18% in 2012 from 15% in 2009. Very clearly, P&G is focused on high growth markets with huge impending growth potential in the consumer market. Going forward, the revenue contribution from Asia will continue to increase resulting in continued top-line growth.
Another piece of data, which underscores this point, is the compounded annual growth rate of sales in the BRIC region. In the last ten years, net sales have grown at a CAGR of 23% in Brazil, 25% in Russia, 27% in India and 17% in China. These robust numbers indicate that P&G has been successful in penetrating in these high growth markets. The overall impact of sales growth in the BRIC region is still limited as developed markets still contribute to 60% of sales and 70% of operating profits. However, one thing is clear; growth will be driven by emerging markets in the future.
The $10 billion cost saving program by the end of 2016 is another positive step towards margin expansion and hence shareholder value creation. The program includes $6 billion of savings in cost of goods sold, $1 billion in marketing efficiencies and $3 billion of saving from non-manufacturing overhead. The positive impact of the cost saving program has been already evident in 2013. For the third quarter of 2013, the core operating profit margin increased by 10 basis points along with an improvement of 20 basis points in the core gross margin.
By combining the above two factors, it can safely be concluded that P&G would continue to reward shareholders with dividends and through stock price appreciation. With a healthy free cash flow position, dividend payment and further share repurchase are on the cards. For the nine months ended March 31, 2013, P&G had a robust free cash flow of $8 billion.
In terms of peer comparison, Procter & Gamble's is trading at a discount based on the P/E ratio compared to its peers - Colgate-Palmolive (CL) and Kimberly-Clark (KMB). P&G also has a relatively attractive dividend yield. Above all, a relatively stronger presence in emerging markets compared to peers gives P&G the edge.
In conclusion, P&G remains an attractive long-term investment opportunity. The current markets might not be the best time to consider exposure to the stock. However, if markets do correct over the next 3-6 months, investors can add P&G to their portfolio for long-term.