Procter & Gamble: There Is Nothing Better Than Following A Winning Strategy

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About: The Procter & Gamble Company (PG), Includes: COTY
by: Antonio Carradinha
Summary

Procter & Gamble has a solid and successful business with excellent earnings power.

The Coty deal was expected to be even better, but it was a highly profitable operation anyway.

The company is an excellent investment for the long run with the prospect of a growing dividend.

In the article I wrote in early July I expressed the opinion that Procter & Gamble (NYSE:PG) was showing strong upside potential, and I set a price target of $92. Since then there were several aspects to take into further consideration. First, the company reported good earnings. Then, it continued its strategic transformation undoubtedly in the right direction. In fact, the company has made remarkable productivity improvements and cost savings that have benefited significantly operating margin.

On the other hand, PG separated its beauty business through a tax-efficient Reverse Morris Trust transaction with Coty Inc. (NYSE:COTY).

In the words of PG Executive Jon Moeller:

On October 1, we reached a very important milestone in our portfolio transformation program, closing the Beauty transaction with Coty. This marks the completion of the most significant portfolio transformation in P&G's history. We have created value for shareowners every step of the way, including over $4 billion versus our keep price in the Beauty deal. (...) We can now begin focusing our efforts on the 10 core categories we identified two years ago. The market in each of these 10 core categories is large and is growing between 1% and 7% per year. These are structurally attractive categories where P&G holds leading market positions. Our businesses in these categories have historically grown sales a point faster than the company and held margins that are 2 points higher than the company average. They leverage P&G core strengths of consumer understanding, innovation, branding, and go-to-market, and benefit from the company's scale.

Seeking Alpha Transcript

While the company reduced overhead roles by around 25% (not including divestitures), the organization was deeply simplified and PG has decreased significantly its network of suppliers. Over the last four years, balance sheet has improved and core earnings per share have increased growth. In the next five years, the company expects to save another $10 billion in costs which will be invested in innovation and sales coverage.

Including the remarkable one-time gain from the Coty transaction, the company expects - in the fiscal year 2017 - to return to shareholders about $22 billion as follows:

- Over $7 billion in dividend payments

- Decreased outstanding shares by $9.4 billion in the Coty deal

- Over $5 billion of share repurchases

It's important to say that the Coty deal was thought to reach around $12.5 billion or even a higher amount. Due to Coty' stock price the deal came at only $11.4 billion still an excellent outcome. In fact, PG's brands sold in this operation would represent a value of only ~$5 billion if they were to be retained in the company.

Conclusion

PG has a high ability to get earnings and cash flow. After the restructuring it has undertaken it will have far greater success in selling products with top brands. It is a solid company that inspires confidence to those who want to invest in the long run with the prospect of a large and growing dividend.

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.

Additional disclosure: The author of this article is not an investment adviser and gives only his personal view and opinion, never making any investment advice or recommendation to buy or sell specific securities. Investors in financial assets must do so at their own responsibility and with due caution as they involve a significant degree of risk. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.