Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Procter & Gamble Earnings Show Stock Is Not A Safe Place To Hide

By Vincent MartinStock MarketsApr 25, 2022 12:19
Procter & Gamble Earnings Show Stock Is Not A Safe Place To Hide
By Vincent Martin   |  Apr 25, 2022 12:19
Saved. See Saved Items.
This article has already been saved in your Saved Items

Turning around a company like Procter & Gamble (NYSE:PG) is like turning around a battleship. The performance of the consumer staples giant over the past decade proves the truth of that aphorism.

P&G Daily
P&G Daily

Procter & Gamble has turned itself around but hasn't done so quickly—or easily. A process that started in 2012 took years to bear fruit. The shares closed at $161.25 on Friday.

When it did, P&G finally got back to being the powerhouse it had been in the past. And PG stock turned from being a laggard to a leader. It pays a significant dividend, distributing $3.65 per share annual dividend for a yield of 2.33%.

However, the problem at the moment, precisely, is that the turnaround is complete. There's little, if anything, left in the way of operational improvements or cost-cutting. Yet, PG stock is trading at historic highs, highs which seem to price in a continuation of the admittedly impressive growth over the past few years.

That outlook appears far too optimistic. Significant challenges loom. Broad market trading has become increasingly volatile.

Some investors are, no doubt, looking to PG stock as a place to hide from that volatility—but there's a good chance those investors will wind up disappointed.

The Turnaround Finally Hits

It took time and effort for the P&G turnaround to work. It began in 2012 with a $10 billion cost-cutting program announced by then chief executive officer, Bob McDonald. Revenue growth stayed low, however, and P&G struggled to increase its earnings and dividend.

McDonald was pushed out the following year, and P&G decided to shrink. The company sold many of its beauty brands to Coty (NYSE:COTY) and divested battery maker Duracell to Berkshire Hathaway (NYSE:BRKa). Under CEO David Taylor, P&G cut down to 10 categories from 15, ostensibly shrinking decision-making and creating a more nimble structure for a business that had gone a decade without creating a billion-dollar brand.

That plan didn't work, either—at least not immediately. From fiscal 2015 to fiscal 2018 (P&G fiscal years end in June), revenue growth for the remaining brands averaged barely over 1%. P&G's dividend had grown at a double-digit clip before the financial crisis; it was increased just 1% in 2016 and 3% in the years immediately before and after.

By mid-2018, PG stock had been dead money for about five years. Peers like Kimberly-Clark (NYSE:KMB) and Unilever (NYSE:UL) looked far more attractive. But from that point on, both the P&G business and P&G stock took off.

Organic revenue growth totaled about 5% from FY15 to FY18; guidance for FY22 suggests it will average above 5% over the following four years. Earnings per share increased more than 10% in each of the last two fiscal years. A 10% dividend hike in early 2021 was the largest since 2009.

P&G has taken market share, launched new products, and improved its competitive positioning overseas (notably in China). As a result, the same stock that lagged peers began to crush the market: PG stock has gained 121% over the past four years and 146% including dividends.

Valuation Concerns Arise

The worry at the moment, however, is that the four-year rally has left PG stock looking rather expensive. Shares trade at about 27x guided adjusted EPS for FY22—which appears to be the highest multiple PG stock has received since at least 2005. The 2.18% dividend yield is the lowest since 2009.

Meanwhile, growth this year should slow across the board. P&G is guiding for organic revenue to grow between 4% and 5%. But all of those gains are coming from pricing; the volume of items sold is expected to be flat. Adjusted EPS (what P&G calls “Core EPS”) should increase just 3%; Core net income should be roughly flat, given an expected lower share count.

27x earnings for essentially zero profit growth quite obviously is not an attractive fundamental combination. Even the dividend yield looks far less attractive now that the 10-year Treasury bond is heading toward 3%.

The PG stock chart seems to highlight valuation worries as well, with the stock repeatedly stalling out at the $165 level going back to late December—and doing so again last week.

There's no doubt that this is a great business. But it's priced as such—to say the least. And investors who think that simply owning a great business is a way to avoid market volatility need only to look at PG stock in the past. Even when the company was performing well in 2008-2009—and, again, raising its dividend 10% annually—the stock still dropped by more than one-third from the beginning of 2008 to March 2009 lows.

Taking The Broader View

To be fair, the valuation worries cited here are perhaps a bit misleading. It's true that P&G's earnings growth is going to be rather modest in FY22. But, as the company pointed out on its post-earnings conference call last week, the problem is higher costs. Chief financial officer Andre Schulten said on the call that higher prices for commodities and freight, plus foreign exchange effects, would total a $3.2 billion headwind for the company this fiscal year.

That figure is after-tax, and works out to about $1.26 per share—more than 20% of the guided core EPS of about $5.85. Some of that pressure is being offset by higher pricing—but not all of it.

So, the underlying business is performing better than EPS guidance might suggest. Total profit won't be flat year-over-year because P&G isn't selling enough; it will be flat year-over-year because inflation has spiked worldwide. In fact, as Schulten pointed out, since the fiscal year began, P&G has raised its estimate of these impacts by 56 cents. Yet, guidance has stayed intact. Excluding those external pressures, the business is performing better than even the company expected it would nine months ago.

The problem, however, is that those pressures don't seem likely to change any time soon. There's no sign commodity pressures are going to ease. Labor and freight inflation remain elevated.

The stronger dollar is perhaps the biggest issue. One of the big problems for P&G last decade was a sharp rise in the dollar. A stronger dollar means that international revenue—56% of last year's total sales—is less profitable, since local currency sales turn into fewer US dollars. That problem is only amplified by the fact that rivals in those countries can undercut P&G on pricing, since they don't face currency pressures at all.

The same Federal Reserve rate hikes driving the 10-year yield higher are likely to strengthen the dollar, since they increase potential returns in dollars on capital from around the world.

To be sure, P&G isn't likely to face another $3 billion-plus in headwinds in FY23. Nor is a stronger dollar alone likely to send the company and the stock back to the dark days of 2015-2018.

But those downside scenarios aren't what is priced in at 27x earnings. Continued growth is. And as well as P&G has performed over the past few years—and even in the most recent quarter—there are an awful lot of stumbling blocks to that growth going forward. Nervous investors are unlikely to ignore those challenges, which means a falling broad market is likely to bring PG stock down with it.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.

Procter & Gamble Earnings Show Stock Is Not A Safe Place To Hide

Related Articles

Procter & Gamble Earnings Show Stock Is Not A Safe Place To Hide

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Our Apps
© 2007-2022 Fusion Media Limited. All Rights Reserved.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
  • Sign up for FREE and get:
  • Real-Time Alerts
  • Advanced Portfolio Features
  • Personalized Charts
  • Fully-Synced App
Continue with Google
Sign up with Email