Knowing when to go from negative to positive (and vice versa) can be like a sixth sense for an investor. Take Procter & Gamble Co (NYSE:PG) for example. When PG stock tumbled from $93 to below $70, I was negative the whole way down.
Earnings growth was negative or stagnant, sales were anemic and the valuation was horrid. Those factors were as true at $85 as they were at $75. But I misread the market’s sentiment and missed the one-year rally from $68 to $90.
Now there’s always a chance P&G shares will decline significantly before it goes higher. But as it stands, this old blue-chipper now has a few catalysts going its way that should excite investors.
The Dividend
One of the first things investors look for from a company like P&G is the dividend. Adding salt to my wound, when PG stock fell to sub-$70 levels, its dividend yield nearly hit 4%. That’s a rarity for Procter. The payout has rarely been north of 3.3% over the last five years.
That said, it rarely falls below 2.75% either.
So the current 3.15% yield is somewhere in the middle. But an above-3% payout is attractive by most standards and gives investors something to chew on while waiting for the turnaround.
Nelson Peltz
That turnaround could (and likely will) come courtesy of activist investor Nelson Peltz. He just pulled off a successful overhaul at General Electric Company (NYSE:GE). The long-time CEO is out and — make no mistake — major changes will be coming to this conglomerate. It will take time, but GE will likely see vast operational improvements.
Peltz took a position in GE in early October 2015 when shares were at $25. The stock quickly found its way to $32 and most recently had been hovering around $30. That may seem unimpressive. But a 20% gain in 18 months with a 3.25% dividend yield is tough to complain about.
At Procter, he’ll have his work cut out for him. But not as much as before. PG suffered heavy revenue declines a few years ago thanks to the volatile currency markets. Along with several struggling brands, currency fluctuations made life tough in the C-suite.
Net income fell sharply in 2014-15, only really recovering in 2016. That’s where I think Peltz can be like gasoline on the fire. He won’t be making changes at a time where P&G is still going through massive struggles. It’s already put a lot of issues behind it. Peltz can now come in and take the next step in making Procter’s operations that much better.
Peltz doesn’t always win, as seen in his failed efforts to break-up PepsiCo, Inc. (NYSE:PEP). Still, the man knows how to create value and he should be able to do so with P&G.
That bodes well for current investors, who could see a ton of that value should Peltz gain traction with management.
Downside for Procter & Gamble
There are negatives, of course. First consider that the positive changes an activist like Peltz brings will take time. He will most likely hit roadblock after roadblock with management. Even if he doesn’t, instituting big changes at a $225 billion company doesn’t happen overnight.
Trading at 21.4x forward earnings and 16x trailing earnings isn’t cheap. It doesn’t get any cheaper when considering P&G will only grow earnings 5% this year and 6.8% next year. Sales are expected to grow just 2% this year and next year.
Few Positives for PG Stock
However, I can think of a few positives on this front. First, sales growth is pretty low, but at least they’re growing. A few years ago, investors would have killed for 2% growth, as Procter & Gamble management were watching revenue and earnings slip through their fingers.
Then there’s the valuation. More than 20x forward earnings for 5% growth is too much in most cases. But there’s a premium for blue-chip stocks with a fat yield. This is particularly true in a low interest rate environment.
However, its trailing earnings valuation is near its lowest since 2013. It also happens to be near the bottom of its 10-year range, excluding the extreme P/E low of ~10x in 2009.
PG stock will certainly have its ups and downs. But if Peltz can prod positive changes and PG’s business can stay on track, long-term investors should be rewarded.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
