by Tom Taulli | May 29, 2013 9:35 am
Activist billionaire investor Bill Ackman got his wish last week when Procter & Gamble (PG) CEO Bob McDonald finally hit the bricks.
Ackman currently owns about $1.8 billion of the company’s stock — and he has not been shy about wanting the CEO to leave. McDonald’s successor was none other than his predecessor, A.G. Lafley — a move Wall Street initially cheered with a 4% shot in the arm.
But do McDonald’s departure and Lafley’s return to the CEO desk make Procter & Gamble a good buy, or is the task of rejuvenating growth too tall for Lafley to handle? To see, let’s look at the pros and cons:
Leadership. When it comes to CEOs, Lafley will likely go down as one of the best in modern U.S. history. During his tenure at P&G — from 2000 to 2009 — annual organic sales grew by 5%, earnings-per-share growth tallied about 12% per year and the stock more than doubled. A key to achieving these results was a laser-focus on innovation. A few breakthrough products included Swiffer and Febreeze, but Lafley also was aggressive with acquisitions, including the $57 deal for Gillette.
Brand Powerhouse. P&G has the largest lineup of leading brands in its industry, with a portfolio of more than 20 brands worth over $1 billion. In fact, some generate more than $10 billion. P&G’s products also cover a wide range of categories, including beauty, grooming, personal health and household care. Just a few names you’ve likely heard of: Head & Shoulders, Olay, Pantene, Mach3, Vicks, Bounty and Pampers.
Dividend and Buybacks. Procter & Gamble has paid a dividend for over 120 consecutive years and the past 57 years has increased that payout. At this point, the yield’s an attractive 3%. To top it off, P&G has also been aggressive with share buybacks. In the fiscal year-to-date, repurchases have come to $5 billion. Plus, over the past decade, PG has returned $98 billion to shareholders in dividends and buybacks — over 90% of net earnings.
Deterioration. To put it simply, Procter & Gamble has stalled lately. The recent sluggishness in North America, as well as the recession in Europe, definitely dragged down P&G’s performance. Plus, it does not help that the company has focused primarily on premium-priced offerings, or that the company has been showing lack of innovation in its product line. For the most part, there have not been any breakout offerings during the past couple years. No wonder the company lowered its profit forecast three times last year!
Bloated Cost Structure. P&G has also shown a lack of discipline in terms of efficiency. A big problem for the company was not fully integrating the Gillette acquisition, for one. But the company also has issues with its manufacturing and marketing. Granted, McDonald recently put in place a sweeping $10 billion cost reduction program to address this … but the goal is to hit that number by 2016. To make Wall Street happy, P&G’s goal may have to be even more aggressive.
Competition. P&G’s rivals have wasted little time in capitalizing on the company’s problems. Companies like Colgate-Palmolive (CL), Unilever (UN), Kimberly Clark (KMB) and Clorox (CLX) have been taking away market share, thanks in part to interesting innovations and also price-cutting and promotions. Plus, private label goods have also been a problem … even some from a few of P&G’s largest retail partners, like Walmart (WMT).
While Procter & Gamble has hit a rough patch of late, the future still looks promising for the company. It has a solid product line-up already, but also room for growth. Just consider these numbers: By 2020, the world’s population is expected to grow by 700 million and 95% of it will be in developing markets. And over this period, the global middle class is also forecast to increase by 1.4 billion and, of course, about 98% will be in developing markets.
As for P&G, about 38% of its sales come from these areas.
Still, to benefit from these megatrends, the company will definitely need to make improvements, such as with its product innovation and cost structure. But the good news is that Lafley has a proven track record and knows how to move a massive organization. It also helps that the company has a set of powerful brands and a strong global infrastructure.
In light of these factors, the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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