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Procter & Gamble: Summary of Earnings Call for Period January – March 2016

| April 28, 2016
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P&G

By Jim Eutsler, HCM P&G Retirement Planning Specialist

P&G announced results from its Jan-Mar’16 quarter, delivering profit ahead of estimates; however, net sales declined -7%. Overall, this was an eventful quarter for the company. They closed on the Duracell sale to Warren Buffett’s Berkshire Hathaway at the end of February. They also announced increasing the quarterly dividend 1% to $0.6695 per share, payable on May 16th which equates to a current yield of 3.3%.

Some key highlights for the quarter:

Organic Sales Growth: 

While ‘net’ sales growth declined, ‘organic’ sales growth increased +1%. Organic sales growth takes net sales growth and excludes the impacts from foreign exchange and acquisitions and divestitures (A&D), which better defines growth generated within the company. P&G has said for fiscal year 2016 (remember, P&G’s fiscal year 2016 is July 1, 2015 through June 30, 2016) they will generate organic sales growth of 0%-3%, with its first reported fiscal quarter (Jul-Sept ’15) being down -1%, second fiscal quarter (Oct-Dec’ 15) up +2% and now the third fiscal quarter up +1%. P&G reiterated its organic sales guidance of 0-3% for the full fiscal year.

P&G is aware it has to accelerate its top line growth and is executing plans to accomplish this. The company is focusing on increasing profitable category growth, such as the expansion of the unit dose laundry category (e.g. Tide Pods) and in-wash scent boosters (e.g. Downy Unstoppables). P&G has also noted on several occasions their intention of reinvesting cost savings back into support on key brands which should help organic sales growth.

Executing an Efficient Business:

P&G is a significant way through a culling process whereby they are selling or discontinuing brands that do not fit the sales/profit profile they desire going forward. Part of this process was the February sale of Duracell to Berkshire Hathaway and the impending sale of several beauty and fragrance brands to Coty which is set to close in the 2nd half of calendar year 2016. In total, since the recent brand divestiture program has begun, they will have sold 105 brands; however, while that number is large, those brands only represented 6% of fiscal year 2013 profits which helps highlight the rationale behind selling them.

Supply chain and logistics efficiencies are also being seen by the company. P&G now has approximately 80% of its volume within 24 hours of store shelves. This helps decrease out-of-stock incidences and allows for a more responsive effort to retailer requests.

Shareholder Value:

P&G returns value to shareholders through a combination of paying dividends and buying back shares. P&G has returned over $118 billion to shareholders over the past decade and plans to return $15-16 billion this fiscal year. In the Jan-Mar quarter, they returned $2.9 billion via $1.9 billion paid in dividends and $1 billion in share buybacks. While the 1% dividend increase is the smallest increase in recent years, P&G states, “the dividend increase reflects the cash impacts from streamlining and strengthening the business unit portfolio and the company’s plans to increase investments in the business to achieve balanced top- and bottom-line growth.”

Shareholder value cannot really be discussed without mentioning cash flow. P&G measures ‘adjusted free cash flow productivity’ which is defined as the ratio of free cash flow to net earnings excluding the gain on the sale of the Batteries business. The target is 90% and so far this year they have delivered 101% for Q1, 117% for Q2, and 105% for Q3. They have now raised the fiscal year outlook to “100% or more” which is a testament to their discipline for cash as they have been making capital improvements all the while.

It is worth noting that P&G is in a transformation period. With a new CEO this past fall and one of the largest brand divestiture programs in the company’s 178 year history currently underway, it will take some time for all the moving parts to settle out. Provided their efforts to grow the topline, reduce costs and remain a company that puts the needs and wants of the consumer first, the renewed focus and efforts they have underway should play out in their favor.

P&G is an example of the type of stock that we use to build The HCM Dividend Growth Portfolio™. This portfolio is designed to provide the opportunity for appreciation that comes from equity exposure, while giving investors a growing stream of income through market cycles.

If you want to walk through this together or just talk about P&G, feel free to reach out to me at jim@hengeholdcapital.com.

Date Posted: 04/29/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. This article should not be taken as advice to buy, sell, or hold P&G stock. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your P&G Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.

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