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Stock Prices and Procter & Gamble

| February 22, 2016
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Procter & Gamble

We often get asked the question, “So, how’s P&G doing these days?” That is not a surprising question to receive given the size of the company, its ubiquitous presence on the store shelves where we shop, and importantly the role it plays in the overall portfolio of many of our clients. That said, we thought it would be beneficial to provide you our perspective on how P&G is doing and what we think of its prospects going forward. We listen to the earnings calls, understand what issues the analysts covering the stock are concerned about, talk to current P&G employees and use our own in-house research to help keep you informed on just how P&G is doing these days.

Before looking at P&G specifically, let’s review what makes the price of a stock what it is. The basic essence of a stock price is supply and demand. A stock becomes susceptible to the forces of supply and demand once it is listed on an exchange. Every public company offers a limited number of shares and depending on demand for those shares by both retail and institutional investors, the stock price will move.

Since P&G’s initial listing on the New York Stock Exchange in 1891, the company has proven its ability to grow shareholder value, to broaden its geographic and product footprint, and pay back its investors via share buybacks and a consistent dividend. The dividend alone puts P&G in a very limited class of companies given, as of 2015, it has paid a dividend for 125 years, with 59 years of consecutive increases.

Let’s get back to the idea of supply and demand and consider some of the factors that affect the stock price of P&G and the directional impact of those factors:

  • Organic Sales Growth: This is topline, or sales, growth excluding 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% and second fiscal quarter (Oct-Dec’ 15) up +2%. The stronger showing in the 2nd quarter will help considerably in allowing P&G to hit their organic growth target for the year.
  • Negative to flat organic sales: While we do not foresee it, future negative to flat organic sales results such as in Q1, in the absence of any offsetting events, will likely result in a decrease in demand for P&G stock as investors wanting a piece of the consumer goods sector will likely invest their money with P&G’s competitors who can achieve higher growth. This is especially true as competitors Kimberly Clark delivered +5% organic sales growth in 2015 and Colgate delivered +5% organic sales growth in the Jul-Sept ’15 and Oct-Dec’15 quarters.
  • Earnings per Share (EPS): Earnings per share serves as an indicator of the company’s profitability. The basic EPS formula is net income (less dividends on preferred stock) divided by average outstanding shares. P&G delivered core EPS of $1.04 (+9% vs. prior year) in the second fiscal quarter, compared to analyst expectations of $0.98/share. EPS can be heavily impacted by foreign exchange movements for a large multi-national such as P&G and for this reason the company will often call out how much of the EPS drag is due to FX pressure. While there are many factors that affect EPS, improving organic sales growth and sustainable margin improvements (see below) greatly help improve the EPS prospects.
  • Sustainable Margin Improvements – P&G saw gross margin improvement of +2.5% and +1.7%, with operating margin improvement of +2.7% and +3.4%, respectively for the first and second fiscal quarters. Those were very large and well received numbers, primarily led by pricing and productivity savings. The productivity savings aspect has the potential for sustainability as P&G is several years into a reduction in workforce targeted at non-manufacturing headcount. Provided these margin improvements prove sustainable, that will give P&G more bottom-line dollars to reinvest in the company, helping foster innovation and capital expansion. Stronger innovation and more efficient capacity should lead to better investor returns (via improved earnings per share), increasing demand for P&G stock.

It is worth noting in the P&G Q2 earnings call that Jon Moeller (P&G CFO) stated P&G’s intention was to reinvest much of the cost savings back into support on key brands, which is often a critical step in reestablishing sustainable top line organic sales growth.

  • Continued Dividend Increases: As noted above, P&G has increased its dividend for 59 consecutive years, a streak the company is very proud of. In fiscal year 2015, P&G paid $7.3 billion in dividends. As of this writing, the dividend is yielding 3.3%. As long as P&G can continue to generate cash flow in a manner that allows for continued dividend increases, that will help this stock remain in favor with the value class investor and help prop up demand for the shares.

Are there several other factors that go into a stock price determination?

Most certainly. Some of those are macro in nature such as geopolitical forces, inflation, interest rates, etc. Some are micro in nature such as what the competition is doing, execution of acquisitions and divestitures, accounting policy changes, etc. While all the factors come into play in one way or another, it is up to the investor to determine if the company is worthy of their investment.

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: 02/22/2016 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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