by Tom Taulli | July 13, 2012 12:51 pm
This week, activist investor William Ackman surprised Wall Street with an investment in Procter & Gamble (NYSE:PG). The buzz is that his position is about $2 billion. While it’s virtually impossible for Ackman to take over the company, he’ll probably find ways to agitate for change.
And investors like it. So far this week, the shares of Procter & Gamble are up about 7%.
In light of this, does it still make sense to jump in? Or would it be better to hold off? To decide, here’s a look at the pros and cons:
Built to Last. P&G has a diverse global platform that has strong positions in categories like beauty, grooming, health care, fabric care and baby care. Just some of its mega-brands include Head & Shoulders, Olay, Pantene, Mach3, Vicks, Bounty and Pampers.
In the past year, P&G posted $82.6 billion in revenues and $11.8 billion in profits.
Stability. If the global economy remains weak, investors are likely to invest more in consumer-staples companies. While P&G may not grow much, it seems likely it will continue to produce substantial cash flows. The dividend yield is also an attractive 3.7%.
Ackman Factor. This will be critical. Given the massive size of Ackman’s position, he’ll have lots of incentive to keep the pressure on P&G. If anything, it could provide a nice floor for the stock.
Competition. P&G has been feeling the heat from rivals. They include players like Colgate-Palmolive (NYSE:CL), Unilever (NYSE:UN), Kimberly-Clark (NYSE:KMB) and Clorox (NYSE:CLX). Unfortunately, it looks like they’ve been taking away P&G’s market share.
Leadership. Since coming on board three years ago, P&G CEO Robert McDonald has not impressed Wall Street. In fact, he has provided three warnings on profits for the current year. McDonald also hasn’t been proactive in finding ways to make P&G a leaner organization.
Macro Economy. True, commodity prices have moderately lately. But that’s also part of the bigger problem: slowing growth across the world. This may be a larger concern for P&G — when compared to its rivals — because it has been increasing prices.
Ackman isn’t perfect. Some of his investments include big losers like JC Penney (NYSE:JCP) and Borders. But when it comes to activist investing, the risks are usually substantial. Expect strike outs.
However, Ackman is likely to be a positive catalyst for P&G. Perhaps his involvement will speed the removal of McDonald. Interestingly enough, rumors are already circulating that the board is looking at this option.
Besides, P&G should continue to pay a hefty dividend — and the cash flows should remain robust. For investors looking for a nice dividend play, P&G looks attractive. So all in all, the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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