Should I Buy P&G? 3 Pros, 3 Cons

by Dan Burrows | August 3, 2012 2:37 pm

Shares in Procter & Gamble (NYSE:PG[1]) rallied sharply Friday after the Dow component said quarterly earnings increased 45% to beat Wall Street’s profit forecast[2]. It also unveiled a $4 billion share repurchase program.

P&G has had a tough time of it lately. The company, which makes everything from Tide detergent to Pampers diapers to Gillette razors, has seen its stock languish in 2012, as seemingly nothing went right. P&G had to cut its sales and earnings outlooks twice in three months, as sluggish global growth, especially in developed markets, weighed on business.

That helped spur activist investor Bill Ackman of Pershing Square to take a $1.8 billion stake in P&G last month, upping the pressure on management to turn things around quickly.

And although the latest results exceeded analysts’ average estimate, it was still a mixed quarter for P&G. Yes, earnings rose, but sales slipped 1.2% and narrowly missed the Street’s forecast.

So, should you buy stock in P&G? Let’s look at the pros and cons:

Pros

Dividend stalwart. Even after Friday’s jump in the share price, P&G’s dividend was still yielding a generous 3.5%. Even better, it’s a dividend you can bank on. P&G has a multi-decade history of rising payouts — that’s why it makes InvestorPlace’s list of Dependable Dividend Stocks[3].

Safety first. This blue-chip stalwart is also an historically steady safety play, with almost ridiculously low volatility. With a beta of 0.27, P&G is essentially 73% less volatile than the broader market. True, it lags when stocks are going up, but it also holds up much better when equities are selling off.

Buybacks and cost cuts. Not only does P&G return cash to shareholders through its healthy dividend, but also through share repurchase programs. The latest $4 billion in buybacks isn’t just a tax-advantaged way to give cash back to stockholders, it also helps provide support for shares. Meanwhile, P&G is also cutting $10 billion in costs through 2016. Taken together, earnings per share should get a lift.

Cons

Valuation. The stock doesn’t exactly scream bargain buy these days, at least not by relative valuation measures. P&G trades at significant premiums to its own five-year averages on both a forward and trailing earnings basis, according to data from Thomson Reuters Stock Reports. It’s also much more expensive than the S&P 500, despite have lower growth prospects.

Turnaround story. Management doesn’t have a great track record after slashing sales and earnings guidance repeatedly, so the market may not have much patience. A multibillion restructuring over the next four years has to show tangible results quickly. As Warren Buffett says, the trouble with most turnarounds is they don’t turn.

Macro problems. Some analysts think P&G isn’t cutting costs enough, and if the global economy keeps headed downward, they may be right. P&G derives the majority of its revenue from developed markets, most of which are either in recession or close to stall speed. Additionally, the effects of a stronger dollar are hurting P&G’s top line. Macroeconomic headwinds are a drag on any progress P&G hopes to achieve.

Verdict

P&G is a core holding for any long-term income investor, so if you own it now for the future stream of dividends, don’t sell. The payouts and hikes will be there, and you’ll likely be grateful for the good they do your total return.

If you don’t own P&G, there’s no sense starting a position when its’ up more than 3%, especially not when the valuation looks a bit rich. Have a little patience and you’re sure to get a better entry point none too soon.

As of the writing, Dan Burrows held none of the securities mentioned here.

Source URL: https://investorplace.com/2012/08/should-i-buy-pg-3-pros-3-cons/

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