Shares of global consumer giant Giant Procter & Gamble (NYSE 🙂 have had a great 2019. Investors sent the shares up to a record high after seeing five consecutive quarters explosively and building strong expectations for the current year.
The shares of & # 39; the world's largest producer of household products rose to $ 126.60 on December 2 after a remarkable turnaround in the past 18 months. The stock closed Thursday at $ 122.51, an increase of around 37% in the past year.
Over the past two years, the maker of Dawn dishwashing soap, Bounty paper towels and Crest toothpaste & # 39; s has been steadily increasing sales, helped by his innovation, marketing and a simplified organizational structure.
P&G reported in October that organic sales, which exclude issues such as acquisitions and currency fluctuations, increased by 7% in the fiscal first quarter, demonstrating that the company is holding on to momentum following the fastest organic sales growth of the previous quarter in more than a decade.
But the growth rate that P&G is showing is unusual for a company that produces everyday consumer goods in categories where competition is fierce and margins are low. From a large consumer giant like P&G, it would not be fair to expect an outlet quarter every time.
During the same period, Kleenex and Huggies maker Kimberly-Clark (NYSE: NYSE 🙂 reported organic sales growth of 4%, while Reckitt Benckiser (NYSE: RBGLY), the UK-based maker of Lysol cleaner and Woolite detergent, reported. disappointing organic growth of only 1.6%.
These concerns have led some investors to question the high valuations of P&G and its potential to turn further upside down after such a fast and powerful rally.
Today, P&G is trading 23.42 times future earnings compared to its five-year average of around 20. In the past ten years, the stock has never had so much gain on the stock market. To put everything in perspective, it is predicted that both Alphabet (NASDAQ 🙂 (NASDAQ: GOOG) and Facebook (NASDAQ: NASDAQ 🙂 will increase their profit by more than 20% compared to the one-digit growth for P&G. These fast-growing technology stocks are traded around 24 times forward.
Another factor that can extract some of the steam from P&G shares is that, due to its defensive nature, it attracted a lot of cash last year because the fear of a global recession grew amid the trade war between the US and China. Once that dispute is settled, or the risks to growth decrease, investors can once again shift their funds to riskier assets, thereby damaging P&G shares.
P&G: consumer share & # 39; most underweight & # 39;
These concerns may apply to short-term investors, but we believe that measuring P&G stock performance based on these statistics does not provide a true picture of the company's growth potential. What drives these price gains is the success of the company in its turnaround strategy to cope with changing consumer needs and to introduce itself to competitors.
Under Chief Executive Officer David Taylor, P&G, based in Cincinnati, reduced the number of brands from 175 to 65, targeting the 10 product categories where the margin is highest. In the course of that process, the company also eliminated 34,000 jobs through a combination of brand sales and buyouts, as well as factory closures – reducing more than $ 10 billion in costs.
These measures clearly help the company to look for higher prices for its products, despite a very good inflationary climate. P&G started phased price increases last summer after not reviving growth by doing the opposite. The shift in pricing strategy will be completed in February, allowing prices to rise between 4% -10% on products, including the Pampers, Bounty, Charmin and Puffs brands.
Goldman Sachs tried to upgrade the P&G shares last year, but tried to remove the overvaluation by pointing to the strong growth momentum of organic sales that could last for the next three years. Goldman said in a note:
"We believe that there is a role to play in the portfolios of investors for a large liquid global base company such as this and note that PG remains the most underweight US stock market listed mega-cap global consumer packaging company under investment funds."
Bottom Line
P&G shares remain our favorite choice of packaged consumer goods companies. It is one of the largest dividend payers in the US – with an annual distribution of $ 2.98 per share for a return of 2.6% – and a track record that is hard to match. The maker of Pampers diapers has increased his payout for 62 consecutive years. Now that growth is back on the right track, investors should expect more substantial dividend increases and we see little reason to abandon this superpower of consumers, even if their shares become somewhat weak.
