Why Procter & Gamble Is A Poor Investment

Published by Nick Mackintosh on

Throughout This Post I’ll Explain Why Investing In Procter & Gamble Stock Would Be A Bad Idea.

Procter & Gamble’s Humble Beginnings

Founded over 175 years ago in 1837, William Procter from England and James Gamble from Ireland met by chance due to marrying sisters Olivia & Elizabeth Norris. Mr Procter was a candle maker and Mr Gamble was a soap maker, and their father-in-law suggested they should become business partners as they needed the same raw materials. The family-run company eventually grew to become the largest and most profitable consumer goods company in the world.

Procter & Gamble’s Best Selling Brands

PG1

Today Procter & Gamble (NYSE:PG) have 66 different brands in 5 different business segments:

  • Baby, Feminine & Family Care
  • Beauty
  • Fabric & Home
  • Grooming
  • Health Care

The company reported its Q4 and fiscal year on July 31st, and the only slight positive was that revenue actually grew to $66.8 billion, a 3% increase compared to 2017. Earning per share (EPS) decreased by 34% though this is due to divesting brands within its beauty segment, though it has recently bought First Aid Beauty for $250 million.

Looking at the sales by business segments it was a mixed bag of results.

Twelve Months Ended June 30, 2018
Net Sales % Change
Beauty $12,406 9%
Grooming 6,551 -1%
Health Care 7,857 5%
Fabric & Home Care 21,441 3%
Baby, Feminine & Family Care 18,080 -1%
Corporate 497 -2%
Total Company $66,832 3%

Decreases can be noted due to evolving consumer shopping habits when it comes to shaving, Gillette for example is rather expensive for something men must do on a daily basis. Discount products such as Dollar Shave Club, owned by Procter & Gamble’s rival Unilever (NYSE:UL), have millions of monthly subscribers. You can get membership from as little as £3, with replacement cartridges sent to your home, even if you were a frugal consumer buying disposable razors at a discount store, the difference in price is negligible!

When it comes to baby products, Pampers has been losing market share to rival brands mainly due to dissatisfied customers. For the environmentally conscious consumers, there are now nappy brands that claim to be nearly 100% biodegradable, so you can have peace of mind that you’re not contributing to landfills. There was also a scathing report about P&G’s practices when it came to the production of Pampers.

Procter & Gamble’s Financials

The company has definitely seen better days in terms of revenue and net income as they’ve steadily declined over recent years. With revenue topping out in 2012, you could make the argument that Procter & Gamble hasn’t done anything in 6 years during a bull market even when consumer confidence has been increasing in countries such as the USA, where the company does around 45% of its business. The strength of the US Dollar is also a particular headwind going forward, as this reduces profits from operations overseas.

2014 2015 2016 2017 2018
Total Revenue (M) $ 83,062 $ 76,279 $ 65,299 $ 65,058 $ 66,832
Operating Income $ 15,288 $ 13,818 $ 13,441 $ 13,955 $ 13,711
Operating Margin 18.41% 18.12% 20.58% 21.45% 20.52%
Net Income $ 11,643 $ 7,036 $ 10,508 $ 15,326 $ 9,750
Profit Margin 14.02% 9.22% 16.09% 23.56% 14.59%
Free Cash Flow Per Share $ 3.48 $ 3.77 $ 4.26 $ 3.42 $ 4.20
Dividend Per Share $ 2.45 $ 2.59 $ 2.66 $ 2.70 $ 2.79
Free Cash Flow Payout Ratio 70.40% 68.70% 62.44% 78.95% 66.43%

While the company can easily afford to pay the dividend, it can really only increase it in alignment with the growth of the business. The recent 3.33% increase is reflective of that as shown above. With the company’s current yield of 3.43% based on today’s share price of $83.69, you would be lucky to generate total returns of 7% a year which is rather lackluster.

Year Cap / Flow CROIC FCF PS
2014 28% 13% $ 3.48
2015 26% 16% $ 3.77
2016 21% 19% $ 4.26
2017 27% 16% $ 3.42
2018 25% 18% $ 4.20

As you can see the company does generate cash returns of 18% with invested capital, and its capital expenditure is extremely low, so the company generates plenty of cash. The company reported free cash flow of $11.15 billion and $7.31 billion was used to pay dividends to shareholders, leaving the company with $3.84 billion to spare.

What I hate is that the company used the remaining cash and another $3 billion to repurchase (buyback) shares at all-time highs! What a complete waste of shareholders money when the company is lacking growth, it only helps management with their KPI targets to receive their bonuses.

Procter & Gamble’s Stock Underperforms The Market And Its Rivals

 

Performance

As you can see from the image above, over the past 10 years Procter & Gamble has only achieved a total return of 6.02% a year, underperforming the 3 major markets in the USA by a significant amount.

Once again you could argue that consumer companies are defensive by nature and typically perform better during periods of uncertainty and bear markets. Therefore it’s safe to assume that Procter & Gambles rivals have likely underperformed too, right?

Performance2

WRONG

For the company to provide a total return of roughly 8% a year just to match the S&P 500, we would need a dividend yield of 5% if the company were to continue to increase the dividend by 3% a year.

To translate that into a share price we simply take its current forward dividend rate of $2.87 and divide by 0.05 to arrive at $57.40 a share. I would strongly suggest waiting for a market crash to buy consumer stocks as you could receive a dividend yield above 5% and a dividend growth rate that outpaces inflation.

For the meantime though, especially when concerning Procter & Gamble, I would advise fellow readers/investors to find a better use for their hard earned money!


Nick Mackintosh

My name is Nicholas Mackintosh and I’m the Creator and Founder of HelpingTheLittleGuy.com I created this website to help anyone looking for a way to save and earn more with their money. Knowledge is given freely in order to give you a fair shake in a system that is determined to keep you poor, preventing you from having the lifestyle you deserve.

1 Comment

James booth · August 20, 2018 at 12:08 pm

Another interesting article

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