It is always sad when a great American company strays off course. While all good investments feel nice, there is nothing like investing in a major American company.
The S&P 500 and its tracking exchange traded fund, SPY (NYSEARCA:SPY), is up over 10% in the last two months, and over 20% in the last year. Still, few sectors of stocks have performed better over the last several years. Specifically, companies in the consumer staple sector such as Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB), Altria (NYSE:MO), Kraft (KFT), and Walmart (NYSE:WMT), have consistently been amongst the strongest performing stocks in the market over the last several years.
No dividend stock has been more popular than Procter & Gamble.
Procter & Gamble is one of the most widely owned companies in the market, and the company's well-known brands and strong commitment to its dividend have made this one of the most popular stocks to own even in bad times.
Still, the stock is basically flat over the last year, and the company has consistently underperformed the S&P 500 and most leading dividend stocks of recent as well.
This is why I think the company's recent earnings report was so interesting. To me, Procter & Gamble's recent earnings report highlighted many of the problems that have plagued this company over the last several years.
There has essentially been a garage sale on Procter & Gamble's market share in Europe over the last several years. While companies such as Unilever (NYSE:UN) and Kimberly-Clark have consistently taken market share from Procter & Gamble with superior products, companies such as Clorox (NYSE:CLX) and Colgate-Palmolive (NYSE:CL) have also taken significant market share from Procter & Gamble with particularly aggressive pricing during these tough recent years.
The weak European economy has presented significant opportunities and strong challenges for many companies. With many European economies growing at close to recession levels, consumers in these countries have increasingly focused on value. Recent earnings reports of companies such as McDonald's (NYSE:MCD), Phillip Morris International (NYSE:PM), and even Apple (NASDAQ:AAPL), continue suggest consumer spending in the Euro-Zone remains weak as well.
This is also why I find the recently positive press reports over Procter & Gamble's supposed earnings beat misleading.
Procter & Gamble reported adjusted earnings per share of $.74 cents a share, with the company reporting a onetime restructuring charge of $.08 a share. The company's earnings of $.82 cents a share were the same as last year, with the company also reporting a negative affect from currency moves of 4%. Procter & Gamble also reported a 3% organic growth rate, at the high end of analyst expectations.
The company's headline number looks okay, and the organic growth looks fairly solid, until you do a little more research.
Procter & Gamble is using over 90% of its net income to buy back shares and pay the dividend, so the company's supposed earnings per share growth was actually a loss even adjusted for the recent currency affect when accounting for management's recent nearly $2 billion share buyback and the company's restructuring costs.
Procter & Gamble recently raised prices by nearly 4%, and has lost significant market share in the last couple years, so the supposed 3% organic growth is misleading as well. While competitors such as Kimberly-Clark have simply taken market share from Procter & Gamble with better personal care products, companies such has Clorox and Colgate-Palmolive have consistently taken significant market share from this industry leader by using lower prices and offering quality products. Colgate-Palmolive's most impressive recent growth was in 2008, when the company priced its products nearly 10% below Procter & Gamble's Crest brand.
Procter & Gamble has consistently tried to use price increases and cost restructuring efforts to compensate for the company's consistent and significant market share losses over the last several years. The company has also sought to appease short-term shareholder concerns with high dividends and buyback initiatives that management continues to increase with debt. Today the company invests less than $4 billion a year in its core business, and the company's consistent market share losses and poor recent product development are two sides of the same coin.
To conclude, while Procter & Gamble remains a popular stock, the management team is running this American icon into the ground. The company's consistently poor product development and unsustainably high dividend and buyback programs are the same issue. While Procter & Gamble has been one of the strongest performing stocks in the market for some time, it is unrealistic to think the company will be able to fix its problems without substantively cutting dividend and buyback program, and beginning to significantly refocus more time and capital on this popular company's core businesses.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.