Procter & Gamble (PG) is a behemoth in the consumer product manufacturing sector and is the largest global producer of household products that range from toilet paper and cleaning supplies to hygiene, beauty and healthcare products. The company's diverse product line gives it a wide economic moat and allows it to tap into many different markets that include cosmetics, cleaning supplies, clothing, men and women's hygiene, and over-the-counter medicines.
While some investors have concerns about Procter & Gamble's shrinking bottom line in recent years, I believe that it is moving towards becoming a leaner operation, and has the ability to keep up its dividend and post growth in value in the near future.
Of the Cincinnati-based company's extensive collection of brands, 24 are worth $1 billion or more and include names such as Tide, Charmin, Downy, Duracell, Oral-B, Gillette, and Pantene. It also owns several over-the-counter brands such as Vicks, Prilosec, and Pepto-Bismol, allowing it to compete in the home drug sector. In recent years, it has been shedding brands in an effort to shift its focus toward increased value offerings and defending its market share against invading competitors.
Its most recent pruning came last month when it sold its Pringles brand to Kellogg Company (K) for $2.7 billion. Procter & Gamble expects the transaction to provide significant value to shareholders with an after-tax gain of over $1.4 billion - which equates to $0.47 per share. The sale of Pringles marks Procter & Gamble's exit from the snacks industry and allows it to focus on its other products, which are more geared toward household cleaning or personal hygiene and maintenance.
In its latest quarter, Procter & Gamble announced growth of 4%, which was a growth of $22.1 billion between October and December compared to last year. It saw an increase in all the six segments the company operates in, with beauty sales up by $5.4 billion, grooming sales up by $2.2 billion, health care product sales up by $3.2 billion, pet care up by $824 million, fabric and home care up by $6.6 billion, and baby care and family care product sales up by $4.2 billion. The increasing cost of commodities contributed to a lower net profit on the quarter, despite an increase in sales across all six segments.
The increasing cost of doing business is a growing trend for Procter & Gamble, which has shown increased sales for three consecutive years, but experienced diminished net profits as the result of its new costs. In 2009, it reported gross revenue of $76.7 billion, with a cost of revenue at $38.6 billion. The following year, in 2010, it saw gross revenue of just under $80 billion with cost of revenue of $37.9 billion, and it brought in $82.5 billion in 2011 while paying $40.7 billion to do so. The result has been declining net revenue that has given the false impression of poor performance.
Procter & Gamble has still held its own against its closest competitors, posting net revenue of $9.8 billion over its trailing twelve months compared to $1.5 billion for Kimberly-Clark (KMB) and $9.6 billion for Johnson and Johnson (JNJ), which operates mainly in the health sector, but has an assortment of family care, grooming and hygiene products to challenge Procter & Gamble and Kimberly-Clark.
Over the last three years, the Procter & Gamble stock has shown steady growth, moving from $45 per share in 2009 to $66 presently. In my opinion, Procter & Gamble still has room to grow, even though it is experiencing rising costs that have hurt its bottom line. In addition to its growth potential, another benefit of a position here is its consistent dividend of $0.52 per share each quarter for a yearly payout of $2.10 per share for a yield of 3.1%.
Procter & Gamble is very committed to its shareholders, in my opinion. It has payout ratio of 0.61 and has a policy of returning a significant chunk of cash flow back to investors. If the cost of commodities, including cotton, lye, cardboard, paper and distilled water can abate, margins can continue to expand. I believe that the result will be an increase to the dividend, giving shareholders a nice reward for their loyalty.
I've seen some analysts report that Procter & Gamble is stagnant, but all of my information leads me to believe that it is moving in a positive direction, despite the headwinds it is facing. It has shown increased sales three years running and is trimming non-core brands to become leaner and more efficient. I believe these actions will pay off and that a gamble here will pay off in 2013.