Reasons To Add Procter & Gamble To Your Portfolio

May.28.13 | About: The Procter (PG)

The announcement that Procter & Gamble (NYSE:PG) was bringing back its old CEO, Alan Lafley, ignited analysts' interest in the company's stock after its disappointing performance in the past few years. Will the return of Lafley be enough to restore P&G's lost luster in the eyes of investors?

P&G's Turnaround

The installation of Richard McDonald as P&G's CEO in July 2009 marked the start of a rough patch for the consumer goods giant, during which it suffered from declining results. Consider that 2008 was a watershed year for P&G, during which it reported record high revenue of $77.8 million and net profits of $12 million. By 2012 net profits had fallen to $10.5 million, a 13% decline.

Meanwhile, P&G's average annual revenue growth of 2.3% was lagging behind those of its rivals in the consumer goods industry. The European Unilever (NYSE:UL) averaged close to 7% annual revenue growth over the past four fiscal years, but even smaller companies such as Colgate-Palmolive (NYSE:CL) and Kimberly-Clark (NYSE:KMB) were able to report better results of nearly 3% and 2.5%, respectively.

Over the past fiscal year, however, P&G had started to turn around due to cost-cutting initiatives it had implemented. P&G had reported four consecutive quarters of improved profits, while its stock price hit a record $82.5 on April 23. Also helping to boost results was the announcement of a $10 billion restructuring plan in February, which aimed to eliminate some 5,700 positions in administration and management by the end of the fiscal year. However, the company has already indicated that it hopes to cut expenses more substantially than what was already laid out in the plan.

Investors have every right to be optimistic that P&G can turn itself around under Lafley's regime, since he's already done it before. During his first tenure as CEO, which lasted from 2000 to 2009, he was able to successfully develop a portfolio of 23 $25 billion brands for the company, including such popular names as Tide and Crest, which generated more than a billion dollars in sales. He was also able to double the company's sales to $80 billion.

P&G's Solid Fundamentals

Apart from the boost the company is sure to enjoy from Lafley's return to P&G's top seat, the company's fundamentals still remain solid.

For example, its gross margins for the latest quarter remained at a high 49.8%, though this was lower than the outstanding 51.2% reported in the second quarter. This means that its restructuring plan is having its desired results, and is helping contribute to a new-found optimism among investors about the company. Its cash flow productivity increased during fiscal year 2012 to 90% productivity on $9.3 billion free cash flow, up from 84% in the previous fiscal year.

P&G's market cap of $214 billion compares favorably with those of its competitors, Johnson & Johnson (NYSE:JNJ) and Kimberly Clark. JNJ had a market cap of $243.9 billion, in line with P&G, while KMB had a cap of $39.8 billion.

P&G is also returning a lot of money to its shareholders in the form of dividend payouts and stock buybacks. It recorded its 57th consecutive dividend increase in April 2013, to $0.60 a share from $0.56 a year earlier, bringing the yield to three percent. In addition, P&G will have bought back some $6 billion worth of shares on June 30, the close of the current fiscal year.

Meanwhile, it was reported that hedge funds remained bullish on the stock, a positive sign for investors. Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) had a position of $4 billion in the stock, followed by Bill Ackman's Pershing Square, which held a $2.2 billion position. In all, some 58 hedge funds had positions in P&G.

There is also hope that P&G's new products will help boost sales growth even if they don't exactly burnish the company's reputation as an innovator. Tide Pods, which the company introduced last year, are on the way to generate some $500 million in sales in 2013. The company's CFO hinted at some products in the pipeline that would reportedly make whole product categories obsolete, but refused to provide details.

Developing markets also represent a possible area of future growth for the company. Some 40% of annual turnover comes from these countries, and the company hopes to expand this by pushing products such as the Ariel laundry line in South Africa and its Tide Pods in Latin and Central American countries like Brazil and Mexico.

The Bottom Line

While is still remains to be seen if its new CEO can turn things around for the company, there is no doubt that P&G still has the confidence of some of the smartest investors in the country. It should be noted, however, that investing in P&G stock is not for those who are looking for quick profits, as the company may see a decrease in revenues for the fourth quarter as it increases spending to launch new products. With a beta of less than one, however, P&G is a good defensive stock to add to the portfolio of conservative investors who want to grow the value of their holdings over the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.