But with a lagging share price and margin pressure, Procter & Gamble has little choice. Batteries are a crummy business, especially since the explosion of personal digital devices that rely on rechargeables.
Procter & Gamble came to own Duracell through its 2005 acquisition of Gillette. Gillette bought Duracell because it thought electric razors were going to be a big deal. They’re not. And even if they were, it’s unlikely they could drive the kind of growth PG needs from its brands if they’re going to stay in the tent.
PG used to like to brag about how many billion-dollar brands it owns, but it’s become to clear to the market and management that size doesn’t matter. It’s tough to drive organic growth (that is, growth coming somewhere other than acquisitions) in the consumer products business. When was the last time Procter & Gamble had a new product category?
Consumer products is a business that runs on incremental changes to existing products and marketing. Procter & Gamble has always had the advantage of holding some of the most popular brands — Tide, Pampers, Olay — and consumers tend to be loyal to their favorites.
But that customer faithfulness was broken by the Great Recession. Consumers were more than willing to save money by buying less expensive alternatives to Procter & Gamble’s premium names. Even store brands grabbed market share.
Procter & Gamble Stock a Long-Time Laggard
That lack of loyalty and bloat hasn’t been good for anyone holding PG stock. Since the bear-market bottom of 2009, PG stock is up 125%. That underperforms the broader market by nearly 100 percentage points. Even with the generous dividend, that’s an ugly comparison.
Divesting itself of sluggish businesses frees up resources for Procter & Gamble to throw at its more successful brands. It sounds like a good strategy, especially in light of all the company’s headwinds.
In the most recent quarter, Procter & Gamble sales were flat. True, that’s partly because of divestitures, but even after adjusting for that and other items, sales only rose 2%. If PG is going to drive anything on the bottom line, it looks like it’s going to come from cost savings much more than revenue.
As the saying goes, you can’t cut your way to growth, and no one expects all that much of it from Procter & Gamble. With a long-term growth forecast of less than 9%, it’s predicted to be more sluggish that even the S&P 500.
And yet it trades at 18 times forward earnings — a premium to the broader market. PG stock is also much more expensive than its own five-year average valuation.
Anyone looking to make a case that the market is overvalued can point to PG stock. As much as the market likes the move to spin off or sell Duracell — shares rose smartly Friday — there’s no much to get excited about.
No, there’s nothing that makes Procter & Gamble a screaming sell. Better times are probably ahead. But with a pricey valuation and extra-tough business environment, there’s no compelling case to buy PG stock either.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.