With the fluctuating economic growth the U.S. has seen over the past year, many investors have chosen to move to the perceived safety of consumer staple stocks such as Procter & Gamble (PG), Colgate-Palmolive (CL) and Altria (MO). This has not necessarily been a bad move with many consumer staple focused indexes and exchange-traded funds up double digits over the past year.
With the Federal Reserve now beginning to pull back on quantitative easing, a new congress elected and a presidential election only two years away, there is certainly a greater sense of urgency to get things done. Economic certainty drives consumer and business decisions and that drives the economy. Now is a good time to take a look at your consumer staple holding, take gains and reallocate to more stocks with greater upside potential. One of those stocks worth a review is PG.
What PG Does
If you look in a dictionary under consumer staples you will probably find either PG or one of it many brands. PG operates in 180 countries under five segments: Beauty, Grooming, Health Care, Fabrics and Home Care and Baby, Feminine and Family Care. PG brands include Tide, Olay, Braun, Pampers and many others you see in the grocery store every day.
Recently, PG has made some changes to its product portfolio by selling its U.S. and Asian pet care division to Mars Inc. and its European pet care business to Spectrum Brands (SPB) earlier this year. In addition, PG has decided to spinoff the Duracell personal power business into a separate company, which will either be spun off to current shareholders or sold.
Why Investors Should Pare Back on PG Stock
Over the past five years, PG annual sales have risen from $79 billion to $83 billion for the fiscal year ending June 30. That is a compounded annual growth rate of just under 1% per year. In addition to sales not growing, profits aren’t growing either. PG’s net income in 2010 was over 16% of sales, and as of the last fiscal year, net income was just over 14% of sales.
Conversely PG’s stock price is up over 44% over the past five years. PG stock has significantly underperformed compared to the S&P 500 due to anemic sales growth and declining income which means all stock price appreciation must have come from multiple expansion.
In 2010 PG’s price-to-earnings ratio was about 18. Today PG is trading at a P/E of over 24. PG stock currently offers a 2.9% dividend yield, which is appealing, but that is still down from over 3% in prior years. Plus, with a payout ratio of over 60% already, I would not look for PG to increase its dividend significantly anytime soon.
PG’s stock is already trading at the 12-month consensus stock price, leaving no room for additional multiple expansion, and with a P/E growth ratio of 2.51, I can comfortably say PG stock is fully valued. With the sale of the pet business and the spinoff of Duracell, PG management is making strategic moves to get things moving again, but what results these moves will have is still uncertain. PG would also benefit with increases in consumer spending, which may be on the horizon as well.
PG’s has a beta of 0.71, which means it is less volatile than the overall market, and PG stock still has a decent dividend yield. I would recommend investors pare back their holdings in PG stock and buy again when the dividend yield moves back to more historic levels.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
