Analyzing Accusations Against Procter & Gamble

Jul.11.12 | About: The Procter (PG)

While my favorite investors often disagree on the "best" stocks in an industry, they rarely have polar opposite opinions on the same stock. But as it turns out, that's the case with Procter & Gamble (PG). Warren Buffett isn't a fan, but Donald Yacktman is definitely a supporter. In Yacktman's words:

I think Procter & Gamble is a great illustration of the difference between being a short-term investor versus a long-term investor. Most short-term investors would probably shy away from it; long-term investors would probably look and say this is a great bargain long term and a great buying opportunity.

Breaking Down Procter & Gamble

There's no question that P&G has been battered in terms of its stock price this year, in part due to many accusations that have been made against the company.

But are the accusations true? I think they bear further analysis.

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Accusation 1: One-Size-Fits-All Strategy

The first major accusation I found in my research is that Procter & Gamble doesn't know how to adapt to local markets. From DailyFinance:

Unilever pays much more attention to local consumers' needs. It takes account of what consumers can afford by offering less expensive versions of its products, e.g., shampoo that comes in sachets, rather than larger bottles. Procter & Gamble, in contrast, has been much slower to adapt its products to local markets, in some cases having mistakenly assumed that whatever sells well in America will automatically sell well overseas.

This is clearly an important point to analyze. After all, growth in developed countries will be stronger than growth in the U.S. While items like toilet paper and shampoo are viewed as necessities in developed countries, many citizens of third world countries view these as luxuries -- luxuries they can obtain as their incomes rise.

After further research, I'm going to have to conclude that this accusation is a myth. I found an interesting piece in Businessweek about Procter & Gamble's innovative strategies in Vietnam. One in particular caught my eye:

The company's legendary marketing studies of its customers -- it conducted more than 100 home visits in Vietnam last year -- have uncovered new uses for some brands. Consider Ambi Pur [Febreze]... P&G realized it might appeal to Vietnamese who ride motorbikes, the country's primary form of transportation, after the government passed a law five years ago requiring the use of helmets. In a country with a humid subtropical climate, P&G this spring set up "spray stations" in front of shopping centers to demonstrate Ambi Pur's fumigating properties. Consumers of all income levels are deodorizing their helmets with Ambi Pur, now one of P&G's fastest-growing products in the country.

The article goes on to cite numerous other examples of Procter & Gamble's strategies for innovation, including a shop-on-a-boat that travels up and down a rural river selling individual sachets of detergent and other products.

While this is only a single anecdotal example, it doesn't seem to fit with the idea that Procter & Gamble is using a one-size-fits-all strategy and only doing things the way we do it here in the good old USA. I don't know about you, but I haven't seen any Procter & Gamble boats chugging down American rivers. To me, that sounds a lot like "a tailored strategy for a specific market." On this count, it seems P&G is doing well.

Accusation 2: P&G's Innovation Doesn't Matter

Procter & Gamble has always had a strong focus on innovation. Yet, some analysts scoff at P&G's R&D:

"They are an $86 billion business," said Ali Dibadj, an analyst with Sanford C. Bernstein & Co. in New York. "The best innovation in the world for them reaches $1 billion in three years. That simply won't move the needle."

The same article goes on to state that research firm SymphonyIRI ranked eight P&G products in its top 25 list of 2011 product launches.

This accusation is perhaps one of the strangest I've ever heard. Innovation doesn't matter? What? Innovation is the lifeblood of progress. People told Henry Ford that his horseless carriage would never catch on. Judging by the traffic I have to deal with every day, I think those people were wrong.

Analysts claiming "innovation doesn't matter" for PG are dead wrong, too. For example, consider the Swiffer -- a product I personally use. Why do I use the Swiffer? Well, before the Swiffer, when you wanted to clean the kitchen floor, you first had to get out the broom. After you'd swept the whole thing, you had to get down on your hands and knees and sweep the crumbs into a dustpan, then spend a few minutes chasing down all the crumbs that just refused to go into the dustpan. When you were finished, you'd have to fill a bucket with water and get a scary-looking mop out of the closet, and the water would slosh everywhere, and it was just a huge pain. On the other hand, with Swiffer -- which stores easily in a corner and dispenses its companion cleaning solution using battery power -- you slap on a cleaning pad, clean your floor, throw the pad away, and you're done. Boom. Now you have time for music, and singing, and genetic engineering.

And Swiffer now generates between $500M and $1B in revenue. Again, boom.

Innovation is clearly important, even in the household goods industry. Just because we've always done things a certain way doesn't mean we'll have to do it that way forever. Who knows what the future will bring? The accusation that innovation is inconsequential at P&G also goes down as a myth.

Accusation 3: Mismanagement

Many commentators have implied mismanagement at P&G in not-so-veiled terms:

"The company has lost share, missed commitments to the Street, missed commitments internally, and is in a much worse place than I think any of us would have anticipated," [analyst Ali] Dibadj said. "Can you hoist that blame just on one person? No, but there's always one person who's ultimately responsible."

The company's response was to announce a $10 billion cost-cutting program, including tactics ranging from job cuts to packaging changes to supply chain modifications. The measures are expected to save $1 billion annually by FY 2016, which is based on ~2.74B shares outstanding and would equate to a 36-cent improvement in per-share EBITDA. This represents a 5.8% improvement to the current per-share EBITDA of ~$6.20.

My conclusion on this accusation is neutral. It's obviously harder to execute a cost-cutting plan than it is to talk about one -- so we'll just have to wait and see how the plan impacts P&G's bottom line. But it is pretty clear to me that P&G's management isn't just sitting around doing nothing.

Conclusion

Procter & Gamble is a solid 3.6% dividend stock with a 55-year history of increasing dividends. The company is going through a bit of a rough patch right now, with the market favoring companies like Clorox (NYSE:CLX), Colgate-Palmolive (NYSE:CL), and Kimberly-Clark (NYSE:KMB). However, I believe P&G's commitment to innovation, new techniques in developing markets, and focus on shareholder value still makes them a good bet for long-term investors.

For a low-risk options play, see Grab 10% Yield on Procter & Gamble.

Disclosure: I am long PG, and I hold PG through the Yacktman Focused Fund.