by Charles Sizemore | October 12, 2012 10:00 am
Bill Ackman doesn’t look like the kind of guy who would make a corporate titan tremble. The principal of Pershing Square Capital Management is a polite, mild-mannered gentleman.
Yet he is also one of the most feared activist investors in the business. Ackman has a track record of taking large positions in “broken” companies and agitating for change, often through management shakeups or major company restructurings (see his current portfolio here). He usually gets his way. So when Ackman singles out a CEO for underperformance, that CEO is justified in feeling like a marked man.
Ackman publicly questioned Procter & Gamble (NYSE:PG) CEO Bob McDonald’s stewardship of the company after Pershing Square became the company’s 10th-largest shareholder, with 21 million shares.
Not all of P&G’s tepid performance of late can be blamed on management. High commodity prices combined with weak consumer demand have crimped profits across the industry. Still, the company’s apparent lack of focus and the fact that it is trailing rival Unilever (NYSE:UL) in many key emerging markets is cause enough for a rethinking of the status quo.
It remains to be seen what Ackman’s plans for the company are. But his presence alone might scare Procter & Gamble’s management straight.
In looking at Procter & Gamble’s recent price, there is a fair amount of optimism baked in. The stock trades for 16 times next year’s expected earnings and 2 times sales. This is by no means overpriced for the consumer staples sector; companies perceived to be recession-resistant tend to trade at a slight premium to the market average.
But given Procter & Gamble’s less attractive positioning in emerging markets relative to Unilever, I would expect P&G to trade at a discount to its Anglo-Dutch rival — not so.
Still, Procter & Gamble is not without its merits. While trailing Unilever in the race for emerging markets (that company derives more than half of its sales from that segment), P&G still gets a healthy 37% of its sales from the developing world. It also pays an attractive — and safe — 3.2% dividend.
So, while investors are waiting for Bill Ackman to work his magic on the company, they can collect a respectable quarterly income.
I wouldn’t expect either Procter & Gamble or Unilever to massively outperform the market in the next 12 to 18 months. The pricing isn’t quite attractive enough in either to make home-run returns a likelihood.
Still, I consider both stocks to be worthwhile holdings in a diversified dividend-focused portfolio. And as an added bonus, both are Dividend Achievers, meaning that they have a long history of raising their dividends.
In a world of sub-2% bond yields, shares of Procter & Gamble or Unilever suddenly look a lot more attractive.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, Sizemore Capital is long PG and UL. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
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