Hedge fund manager Bill Ackman recently disclosed a $2 billion position in shares of Procter & Gamble (NYSE:PG). P&G is a longtime staple on my Common Stock Monster Master List. Ackman pursues an activist investment strategy, whereby he often takes a large stake in a firm and agitates for change with the obvious goal of unlocking shareholder value.
Ackman’s recent successes include an effort to split up conglomerate Fortune Brands (NYSE:FBHS) which resulted in a near doubling in the company’s stock price. Ackman also agitated for change at my favored Canadian Pacific (NYSE:CP). Canadian Pacific shares are up more than 50% since the hedge fund manager first disclosed a position in the stock last October.
Ackman hasn’t shown his cards on P&G yet, but he is expected to seek deeper cost cuts to improve the company’s lagging profitability and changes in the company’s top management. The problem for Ackman is that P&G is one of the world’s largest companies. His $2 billion investment is equal to only 1% of the company’s outstanding shares. If Ackman is going to successfully agitate for change, he is going to have to get other P&G shareholders on his side.
I welcome an effort to enhance shareholder value, but if Ackman’s goal is to increase short-term profitability at the expense of long-term value, he isn’t likely to find many allies. My own view is that P&G’s problems have a lot more to do with an unusually long period of economic stagnation in the U.S. and other developed countries than management missteps.
Yes, P&G can probably trim some fat and do a better job in emerging markets where it has lagged competitors. But as I see it, P&G’s main problem is their premium products strategy. I don’t fault management for focusing on higher-end products. It is a better long-run strategy. You don’t build brand value by chasing cost conscious consumers.
In a more robust economy, P&G’s premium products strategy will excel. In the meantime investors collect a 3.4% yield and benefit from a recently announced increase in share buybacks. Buy.