Procter & Gamble (NYSE:PG) stock had a rough year in 2015 going from $90 a share at the beginning of the year all the way down to the current price of $75, and that is after a small bounce in December week. Some of the reasons for the stock's decline was disappointing revenue from the most recent earnings report and general concern about the continued Chinese market rout, coming interest rate increases, and vague fear about the stock market. Investors should take heart in management's 2014 deal to partner with Amazon (NASDAQ:AMZN), which has become the titan of online retail dominating 2015 perhaps more than even Bezos himself expected. When you take a long-term view, PG is a very good deal at current prices.
Warren Buffett has made a huge bet on the company and while many are pointing out the fact that the stock is down since the purchase as evidence he has lost his Midas touch, one has to remember that he takes a very long-term view of his investments. In virtually every annual report to shareholders that have now become famous, Buffett reminds investors that he looks at results over five-year time periods, much longer than the typical investor looking at yearly or quarterly results. With PG, this approach makes a lot of sense because its products dominate the nation's retail sector and is not in danger of decline simply because it had one quarter where revenue came in lower than expected by Wall Street.
The stock trades at a forward P/E of only 18, which is a discount to the average P/E of the whole stock market, which is still near 20 even after the recent scary sell off. And while this doesn't seem like a huge discount to the market average, PG is anything but an average company, which makes this valuation conservative.
This conservative valuation makes PG attractive as we go into a volatile year where pundits have predicted stocks to go every which way imaginable, which means there is a great deal of uncertainty in the market generally. But there isn't much uncertainty about what will happen with PG. The company will make a ton of money and will do even better if the economy goes into a recession because investors will gravitate toward safety, and it doesn't get much safer than leading company in the consumer discretionary space with products that have inelastic demand. Even with the so-called disappointing earnings report, the company still increased quarterly YoY earnings by 30% and made over $7 billion in profit in the first half of 2015 alone.
The 3.34% dividend is a nice bonus to the stable underlying business model and in combination it makes for a very defensive long-term holding, especially at today's prices. We should never invest in a business just because a famous investor does because that person, in this case Mr. Buffett, may have different goals than us, and in his case, he is trying to deploy huge amounts of capital which leaves him with far fewer options than the typical investor. On the other hand, when you look at his move, it seems clear that what he sees in PG is a conservatively financed company that is extremely unlikely to go out of business over the next several decades that also pays a decent dividend. The company trades at only 3 times book value and has a solid 13.86% ROE, which are further positive indications of the company's conservative valuation and efficiency of operations.
So while you may not get rich quick by buying shares of PG, you are very unlikely to lose money over the long term and can collect the nice dividend no matter what happens. Going into the scary 2016 market with so much uncertainty it makes sense to be defensive and there aren't too many places in the market more defensive than the market leader of consumer staples that pays such a nice dividend. And history has shown that the Dogs of the Dow tend to have large gains after a year of underperformance. If that's the case this year, then PG's stock is set to outperform the market in 2016.
Disclosure: I/we 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.