Procter & Gamble Co (NYSE:PG), historically one of the market’s best recession insurance policies, has caught fire this year. PG stock is 8% mostly on expectations activist Nelson Peltz of Trian Fund Management can turn it into a high-flyer.
Trian has put $3.5 billion into PG stock and now has about 2.4% of the common, which has a market cap of $240 billion.
Trian’s track record hints it will seek board seats and push for operational changes at the Cincinnati-based company. While the fund has yet to publish a white paper on its proposals, as it has done in the past, speculators aren’t waiting and are already piling into PG stock to watch the fun.
What might fun mean for Procter & Gamble in the event of a recession?
P&G Is Recession Insurance
PG stock has a stellar track record as a place to ride out tough times and has paid dividends continuously for more than 125 years. While the value fell during the 2008 crisis, from about $70 per share to $45, the dividend increased 10% and the share price was back to its 2007 level within one year.
The same thing happened following the 2000 dot-com collapse. The PG stock price halved but the dividend was increased, and by 2002 it was again trading at pre-collapse levels. Procter & Gamble shares were barely touched in the 1987 crash, and after two hikes in the dividend, they split in 1989.
Procter & Gamble accomplished these financial miracles because its brands sell, come rain or come shine. Crest, Tide, Dawn, Bounty, Pampers — these are essentials consumers buy when they stop buying everything else.
In the current recovery, Procter & Gamble has sought faster growth by consolidating brands, selling its Duracell battery unit to Berkshire Hathaway Inc. (NYSE:BRK.A) and its beauty products units to Coty Inc. (NYSE:COTY).
What Peltz Wants
The balance sheet currently shows over $13 billion in cash and $18 billion in long-term debt on $127 billion in assets. Cash flow from operations tops $15 billion per year. To me, PG looks like a company poised to grow, not downsize, which is what Peltz usually wants.
How can Peltz top what Procter has done already, slimming from 165 brands to 66, growing margins, raising the dividend and buying back shares to maintain the PG stock price?
By focusing on short-term profits, Peltz could wind up hurting both P&G and the economy. A little fat is what you need to get through tough times. He could also hurt the larger economy. Procter’s size enables it to focus on large issues like fixing the Internet advertising supply chain, currently a mass of incompatible metrics and unaccountable spending.
So What Happens to PG Stock?
Wall Street has all sorts of ideas for improving results, some of which Peltz might demand P&G directors adopt.
He could push the company to adopt zero-based budgeting, as 3G Capital has done at Kraft Heinz Co (NASDAQ:KHC) and Restaurant Brands International Inc (NYSE:QSR), which owns Burger King. The problem is that doesn’t always work.
Peltz could also demand a break up of Procter & Gamble, perhaps into three units, forcing accountability on long-tenured staff and creating pressure to cut costs.
Or, he could refocus P&G on developing markets, taking a page from the playbook at Reckitt Benckiser Group Plc (ADR) (OTCMKTS:RBGLY), buying product categories that appeal to Asian consumers and selling the rest. That’s a move I can personally get behind.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.