by Lawrence Meyers | October 25, 2011 8:28 am
Today, we’re looking at Dow Jones Industrial Average component Procter & Gamble (NYSE:PG). The consumer products company produces some of the most famous brands in the world.
P&G offers beauty products and skin care products including the brands Head & Shoulders, Olay, Pantene, Wella, Braun, Fusion, Gillette and Mach3 brands. It also provides health care products like Always, Crest and Oral-B brands; snacks and pet care products under the Pringles and Iams brands; fabric care and home care products consisting under the Ace, Ariel, Dawn, Downy, Duracell, Gain, Tide and Febreze brands; and baby care and family care products under Bounty, Charmin and Pampers brands. The company is truly global, hocking its wares in some 180 countries.
The key driving factors for Procter & Gamble are competition and the economy. Now, P&G’s diversified product line insulates the company to a certain extent against economic downturns, because many of the products are consumer staples. However, the competition now offered by grocery stores’ “private labels” has become an increasingly vexing problem. Nevertheless, P&G is so gigantic that even in tough times it produces big profits — $13.4 billion in FY 2009 when the economy was having its toughest time.
Procter & Gamble’s financials are solid. Don’t be perturbed by the $22 billion in debt. It’s only being carried at around 4%, and P&G has $2.8 billion in cash. Trailing 12-month cash flow was $9.5 billion, so the debt service is no problem, and it’s almost twice the amount of free cash flow necessary to pay P&G’s 3.2% dividend.
We generally don’t see venerable companies like this have many insider trades, but there have been four of them totaling about 17,000 shares (both direct and indirect) during the past two years, all between $60 and $64 per share. Another confidence booster: Iconic investor Warren Buffett owns 2.5% of P&G.
Stock analysts looking out five years on P&G see annualized earnings growth at 9%. At a stock price of $65, on FY 2015 earnings of $6.48, the stock presently trades at a P/E of 10. That suggests P&G is fairly priced — for 2015! Given the company’s recent warning about commodity prices potentially impacting revenues going forward, and given that the dividend isn’t generous enough for retirement accounts, I don’t see any value here.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.
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