by Robert Gordon
With a world filled with debt issues in the United States and Europe, a potential Chinese real estate bubble, and questionable economic policies, some companies will stand out due to steady, predictable growth and dividends. First and foremost to me in this category of defensive stocks, is Procter & Gamble Co. (PG). The behemoth business started in 1837, and has been through wars, depressions, and nearly every conceivable economic environment. I will take a closer look at its numbers to show why this company makes sense to so many different investors.
Procter & Gamble is one of the world's leading consumer goods companies, with operations in over 180 countries on six continents. Its stock was trading recently at about $65 per share, near the high end of its 52 week high of from $67.32 to $57.56. It has a market capitalization of nearly $180 billion, and a P/E of 16.5. It currently pays a quarterly dividend of 52.5 cents per share, for an annual yield of 3.2%.
In 2012, Procter & Gamble will be celebrating its 175th anniversary. It owns 24 brands-- from Eukanaba pet foods, to Gillette, to Tide-- that each sells over $1 billion in product worldwide. Procter & Gamble's products are available at literally millions of retail shops; although Wal-Mart Stores Inc. (WMT) accounts for over 15% of the over $80 billion per year that Procter & Gamble sells.
Procter & Gamble's fiscal year ends June 30. In the first quarter of its 2011-12 fiscal year, PG reported sales of $21.9 billion, up 9% year over year. Three factors behind that increase were (1) price hikes (2) volume increases, and (3) currency adjustments. The currency alone accounted for over half the company's sales increase, and is most unlikely to be repeated with any consistency. PG reported profits down about 2% year over year, to $3.02 billion. But per share income was up 1%, to $1.03, due to continuing share repurchases.
Procter & Gamble divides its business units by product type. These units are: beauty, grooming, health care, snacks and pet care, fabric care, home care, baby care and family care. Each of these product units increased their sales by from 6% to 12% in the first quarter of 2012, but of these groups, snacks and pet care is by far the smallest, with sales of $776 million in the quarter.
Procter & Gamble was caught in a bit of a squeeze last quarter, in that commodity ingredient costs rose faster than Procter & Gamble's ability to enact stable price increases. Procter & Gamble's operating margin in the first quarter fell a whopping 260 basis points, to 19.8%. I do not expect the sort of commodity cost inflation to persist, and in fact, some commodities such as sugar and copper have begun to fall in price. No one can know the time table for the ebb and flow of commodity prices.
Even at the current lowered margin levels, Procter & Gamble is still an efficient and well run company. Its operating margin is still well above competitors like Kimberly-Clark Corporation's (KMB) 14.1% and Clorox Inc.'s (CLX) 17%.
One thorn in the side of Procter & Gamble has to be its effort to finally divest itself of all food businesses in order to concentrate on its core business. An agreement was reached early in 2011 to sell Pringles Potato Chips to Diamond Foods, Inc. (DMND) for $2.35 billion. However, the business of Diamond Foods has taken a huge hit due to allegations of irregular payments to growers, and the Pringles deal has been delayed indefinitely.
While the most recent quarter's result was far from perfect, there is so much more to like about Procter & Gamble, and it would be wrong for one quarter of the company's 700 quarter history to be the sole factor. Procter & Gamble has been very good to shareholders over the years. It has paid annual dividends since 1890, and has raised its dividend each of the past 55 years. That makes it an ideal candidate for the dividend reinvestment plan (DRIP) that it offers. PG has also been in the habit of buying back its own stock over the years. Outstanding stock has fallen from nearly 3.2 billion shares in 2006, to roughly 2.9 billion today.
Procter & Gamble's balance sheet gives me some concern. Cash on hand is about $3.5 billion, but debt is over $35 billion. The company's credit worthiness is not an issue, but I would like to see the company do more to relieve its debt burden to enhance its own flexibility going forward.
This company is exceptionally well positioned. 63% of its sales occur outside the U.S., and many millions of people in the developing world are joining the middle class every year, and are better able to afford the perceived high quality of Procter & Gamble products. Procter & Gamble's reliance on international sales also entails some year to year profit volatility due to currency adjustments. So too, the United States is-- at some level-- pondering tax changes on the foreign operations of companies based in this country. It is also the leading research and development innovator among consumer products companies.
Analysts and institutional investors have long had Procter & Gamble among their favorite stocks. Warren Buffett first bought Gillette Company in 1989, and when Procter & Gamble acquired the razor maker in 2005, he liked that merger so much he called it a dream merger. Buffett still owns some 77 million shares of Procter & Gamble, and Donald Yacktman owns 12 million shares. Analysts in general give the stock a 1.9 mean rating, a fairly strong buy. Analysts also estimate 2012 fiscal earnings of $4.19 for Procter & Gamble's fiscal 2012, which would be a year over year increase of 6.6%. A broad and sustained retreat in commodity prices would allow an even stronger profit increase. Procter & Gamble also has a Beta of .50, indicating that the Procter & Gamble share price is only half as volatile as the average stock price.
In my opinion, there is no better “buy it and forget it” stock than Procter & Gamble. Only those seeking thrill rides in their stock picks should look elsewhere.