Procter & Gamble Company (PG) is a consumer packaged goods company that sells a diversified portfolio of products in over 180 countries. The stock is quite popular among hedge funds. As of December 31, 2011, there were 36 hedge funds reported to own Procter & Gamble in their 13F portfolios. At the end of last year, Warren Buffett was the most bullish hedge fund manager about Procter & Gamble. His Berkshire Hathaway disclosed owning $485 million worth of Procter & Gamble shares. Ken Fisher, Bill Miller, and Ric Dillon were also in favor of Procter & Gamble.
In fact, we expect the number to be even higher right now as the company announced in February a cost reduction plan and a plan to divest its Snacks business. We think these restructuring plans will attract some event-driven hedge funds. Let's take a closer look at Procter & Gamble's recent announcements and some other aspects of the company.
First of all, we like Procter & Gamble's diversified portfolio of products and its broad geographic reach. As a result, the company is relatively stable. Its beta is 0.44, indicating that the changes in the economy are relatively unlikely to affect its performance. We also like the company's emphasis on innovating new products and expanding into developing countries. We believe these two factors will be the main drivers of Procter & Gamble's future growth.
Procter & Gamble has a current P/E ratio of 19.78, on par with the 19.61 for the average of its peers. The company is expected to make about $4.03 in 2012 and $4.38 in 2013. Therefore, its forward P/E ratio is 16.7, also on par with the industry average of 16.61. Over longer terms, Procter & Gamble's earnings are expected to grow at about 9% annually. Though the company does not seem to have an absolute advantage in valuation, it has other strengths. For example, Procter & Gamble has a decent dividend yield of 3.12%. The company's earnings yield is around 5%, which means that it pays out about 60% of its earnings as dividends. So, the company still has the ability to raise its dividend payouts in the future. In fact, Procter & Gamble has an impressive record of increasing its dividend payments. The company has been raising its dividends for 55 consecutive years. Last year, the company increased its quarterly dividend from $0.4818 per share to $0.5250 per share. In addition to paying out dividends, Procter & Gamble also used its earnings to buy back shares, which is also good for investors. In the past two years, the company spent $13 billion in stock buybacks.
In February 2012, Procter & Gamble announced that it plans to reduce its costs by up to $10 billion in the next five years, with about $8 billion from cost reductions and $2 billion from cost control and leverage of fixed expenses. The plan is expected to provide up to 10% benefit to the company's operating margin. On the other hand, the benefits on margins might be offset by rising commodity costs and competitive pricing. Therefore, the actual influence of the cost saving plan is unclear at this moment. Procter & Gamble also announced in February that it had reached an agreement to divest its Snacks business to The Kellogg Company (K) for $2.7 billion cash. The deal is expected to be completed in mid 2012. According to Procter & Gamble, the transaction is expected to provide a gain of $0.47 to $0.50 per share.
A few major competitors of Procter & Gamble are The Colgate-Palmolive Co (CL) and Kimberly-Clark Corporation (KMB). Colgate-Palmolive seems to be a bit overpriced, as its forward P/E ratio is 17.6, while Kimberly-Clark has an attractive forward P/E ratio of 13.23. It also has a decent dividend yield of above 4% and a payout ratio of 70%. Similar to Procter & Gamble, Kimberly-Clark also has an impressive dividend growth history. It has been increasing its dividend payouts for nearly 40 consecutive years. The company has also been using its earnings to repurchase stocks. It bought back $1.24 billion of its shares last year and it expects to repurchase another $1.1 billion this year. We believe the fat dividends and the share repurchase plans of both Procter & Gamble and Kimberly-Clark will enable their stocks to deliver decent returns in the next couple of years.
Note: This article is written by Guan Wand and edited by Meena Krishnamsetty.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
