It’s coming down to the wire at Procter & Gamble Co (NYSE:PG). The PG proxy fight is one of the biggest in history, pitting billionaire Nelson Peltz, who owns 1.5% of PG stock, against the 20th largest company on US markets (by market cap).
The PG proxy fight isn’t just one of the largest — it’s one of the most aggressive. Both Peltz and P&G executives, including CEO David Taylor, have made the media rounds. The unusually large base of retail investors that hold PG stock have received phone calls, social media messages and multiple proxy mailings.
At the moment, Peltz appears to have the upper hand. Shareholder advisory services ISS and Glass Lewis both have come out in favor of the activist. That doesn’t guarantee victory, but both funds are likely to sway the institutional investors who still own about 60% of PG stock. Peltz’s demands aren’t huge — just a single board seat — but his plans could be expansive. For its part, P&G believes it’s already done much of the heavy lifting Peltz describes.
Neither side is wrong, necessarily, though I do think P&G shareholders should vote for the activist here. P&G has made a huge amount of changes over the past five years. Peltz, meanwhile, has a track record of success at major consumer products companies. But whichever side wins, I’m not sure the outcome of the PG proxy fight will change all that much for PG stock — and that’s kind of the problem.
The Odd PG Proxy Fight
The simplest reason for keeping the status quo at P&G is that the company already has done a lot of heavy lifting — partially in response to another activist. Pershing Square Capital Management head Bill Ackman owned about 1% of the company earlier this decade (though, unlike Peltz, he didn’t initiate an actual proxy fight). At a 2013 conference, Ackman cited a $125 per share price target for PG, which had undertaken a $10 billion cost-cutting effort. The investor criticized management and argued the company was capable of stronger revenue growth and better margins.
Just a few months later, CEO Bob McDonald left the company under pressure from Ackman, with former CEO A.G. Lafley coming out of retirement to return to the top spot.
And P&G’s reinvention continued. The company sold Duracell to Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B) in exchange for PG stock owned by Berkshire. It divested its beauty brands to Coty Inc (NYSE:COTY). It shut down over 100 smaller, unprofitable brands and reorganized itself into 10 categories in an effort to streamline operations and decision-making.
Peltz wants the process to go further, with his plans for P&G to trim down to just three operating units. Still, the fight itself is somewhat strange in the context of past moves. P&G already has taken billions out of its cost base, and is taking out billions more to be reinvested in sampling and brand marketing efforts. It’s sold off brands. A lot has been done — which raises the question of what more Peltz really expects.
The Activist Plan
Peltz’s response is that the productivity plan didn’t work. In a slide on the Revitalize PG website, Peltz points out that $7 billion of the $10 billion in savings were lost to currency impact (a major problem for P&G over the past few years). The remainder “did not drive sales or profit.”
That’s true. But it’s not entirely clear what Peltz believes should be done next. Peltz’s criticism of P&G has focused mostly on supposedly excessive “bureaucracy” and disappointing shareholder returns over the past decade. He’s also pointed to his own success at other firms, among them Kraft Heinz Foods Co (NYSE:HNZ), PepsiCo, Inc. (NYSE:PEP), and Wendys Co (NASDAQ:WEN).
From here, a vote for Peltz makes some sense, if only because giving a single board seat to an esteemed investor seems a worthwhile step. But a backward-looking track record doesn’t suggest an easy path looking forward. Indeed, I’m highly skeptical that Peltz’s plan for P&G will make much of a difference — because I’m highly skeptical that P&G’s problems can be fixed easily, or at all.
PG Stock Still Has Problems
At the end of the day, the world is moving away from P&G. Its core portfolio of consumer brands are facing ever-increasing competition from private label brands. The company isn’t winning overseas, most notably in China, where revenue has declined over the past two years.
Indeed, even before the PG proxy fight, I thought PG stock was overvalued, though it does sit not far from an all-time high. Earnings growth has stalled out, with core (adjusted) earnings per share of $3.92 in fiscal 2017 (ending June) barely above the $3.85 reported five years earlier. Dividend increases have gone from 10%+ a year last decade to an average of 2% over the past three years. The only reason PG stock has gained in value in the last few years has been because its multiple has expanded — to near an all-time high.
To be fair, there have been currency issues, but that aside, this is not a company that is showing much in the way of growth. Organic revenue growth was 2% in FY17, and it’s expected to be 2-3% this year. The figure hasn’t reached 5% since 2008.
That type of growth isn’t enough, particularly given — as Peltz notes — the amount of cost savings reinvested into marketing.
But, really, what can P&G do at this point? Analyst Ali Dibadj of Bernstein, who covers PG stock, put it best two years ago: “I think it’s a unique time in the consumer industry’s history where you’re seeing a lot of ‘Davids’ beating ‘Goliaths’ every day.”
Those Davids have been beating the P&G Goliath for years now… and I don’t think Nelson Peltz is going to reverse that tide.
As of this writing, Vince Martin has no positions in any securities mentioned.