With P&G (NYSE: PG) outperforming the S&P 500 by 3% year to date, investor sentiment in the consumer goods company seems to be relatively robust. However, we think there is the potential for investor sentiment in P&G to improve yet further and push the company's share price higher at a much faster rate than the wider index. Here are the catalysts we think will cause just that.
The majority of P&G's business is done outside of North America, and the company has major exposure to emerging markets. We feel this provides P&G with a superb growth avenue moving forward, since the size and wealth of the middle class in countries such as China and India are expected to grow rapidly in future years. For example, in China, it is estimated that by 2022, 75% of urban dwellers will earn between $9000 and $34000 per annum, and in our view, this presents a major catalyst for growth in demand for P&G's products, which should boost its profitability and share price.
Alongside this, P&G's international exposure could also be a positive catalyst for investor sentiment, because it reduces risk for the company. By being geographically diverse and not wholly reliant on the US for sales, P&G offers a reduced risk profile for investors. And with the outlook for the US economy being somewhat uncertain, due in part to planned interest rate rises which could dampen consumer sentiment, we think that investors could view the company's diversity much more favorably moving forward. This improved investor sentiment could act as a positive catalyst for the share price.
Having international exposure also means that P&G may benefit from a turbo boost to its earnings from slower-than-expected interest rate rises. This isn't contradicting our previous point on interest rate rises (in the above paragraph), since we believe they are on the horizon, but we do believe the rate of monetary policy tightening will be slower than has been priced in by the market. As such, we are of the view that the US dollar will weaken moving forward, and this could cause a positive currency translation effect for P&G and help to push the stock higher.
In fact, multiple interest rate rises were planned for this year, and that now seems somewhat unlikely. In any case, P&G's product stable again lowers the risk of investing in the company, with it having a range of brands which command a high level of customer loyalty. This could allow P&G to raise pricing at a faster pace than is the case for many of its rivals, since customers may be willing to pay more for the market-leading products.
And with P&G having made multiple asset disposals and streamlined its business model, it now appears to have a stronger product offering which could appeal to investors during what is an uncertain period for the global economy. As such, the company's product portfolio and the pricing and volume potential which it offers could act as positive catalysts for investor sentiment and for its share price.
In addition, P&G remains a top-notch income stock. It currently yields 3.2% versus 2.2% for the S&P 500, and with interest rates being low and set to rise at a relatively modest pace moving forward, we think P&G's dividend appeal will help to drive demand for its shares (and the share price) higher. Furthermore, the company has an excellent track record of dividend growth, with dividends per share having increased by 115% in the last decade. While inflation may not be a major threat to investors right now, the high chance of a real-terms rise in income, coupled with a relatively high yield could sway investors to buy P&G and help to push its share price higher.
Of course, P&G's valuation is often cited as a stumbling block for many investors. Sure, it is rather high, but in our view, it is a fair price to pay for a high-quality business which is set to keep beating the S&P 500 moving forward.
For example, P&G has a forward P/E of 21 versus 18 for the S&P 500, but in our view, this premium is well deserved. And while P&G is undergoing a period of change in leadership and a restructuring which inevitably carries some risk, we think the company's international exposure, the potential for a positive currency translation, brand strength, income appeal and the high degree of diversity make it a sound buy.
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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.