Procter & Gamble Co Stock Continues to Struggle Despite Earnings Beat

PG - Procter & Gamble Co Stock Continues to Struggle Despite Earnings Beat

Source: Mike Mozart via Flickr (Modified)

Procter & Gamble Co (NYSE:PG) stock took a hit following its earnings announcement. Although the company beat on both revenue and net income, earnings guidance disappointed Wall Street. Most of its peers in the consumer defensive sector also saw stock price drops on slower-than-expected growth.

With popular product lines, a history of stability and high dividend yield, PG has enjoyed one of the longest histories on Wall Street. Despite this track record, with its struggles to grow revenues and its lackluster price growth, only income-oriented investors should consider buying PG stock.

PG Stock Fell Despite an Earnings Beat

Q3 2018 net income estimates came in at $1 per share. This beat estimates by 1 cent per share and marked an improvement over the 96-cent per share profit PG earned in the same quarter last year. The company brought in $16.28 billion in revenue, $60 million more than analysts had expected. Revenue also grew by 4.3% on a year-over-year basis.

Despite these results, the stock fell about 4% following the announcement. The company also said that they expected organic sales growth to fall in the 2%-3% range.

Not only did PG stock fall, but also peers took a hit. Colgate-Palmolive Company (NYSE:CL) fell by over 3%. Kimberly Clark Corp (NYSE:KMB) saw a stock price drop of almost 4%. Unilever NV (ADR) ADR (NYSE:UN) lost 2.5%. Clorox Co (NYSE:CLX) fell by nearly 6% as it received a downgrade from Morgan Stanley.

Wall Street Sensitive to Revenue Issues

Although this sector receives little love from Wall Street, consumer defensive stocks have become a staple of conservative portfolios with their recession-proof product lines and high dividends. As the maker of such products as Crest toothpaste, Charmin bath tissue, Gillette razors and Tide laundry detergent, most American households use Procter & Gamble products.

However, as a stock, PG will neither impress nor disappoint investors with its performance. Investors wanting stock price growth should avoid PG stock. The S&P 500 has risen about 4.4 times from its 2009 low. PG stock is up less than double in the same period.

Revenue growth has also become a nagging problem with this stock. Between 2013 and 2017, yearly revenues fell by almost 20%. Although PG products retain name recognition, they often do not stand out on quality. Moreover, due to e-commerce, consumers can often buy consumer staples directly from companies. This has rendered the in-store advantages PG enjoyed less valuable. Though the company seems to have reversed the decline, any negative news on revenues tends to alarm stock market bears.

Despite Issues, Procter and Gamble Compares Well to Its Peers

Fortunately, the revenue woes have not eroded PG stock’s most positive factor, its dividend. At a yield of over 3.5%, cash payouts remain strong. Moreover, few can match the dividend track record of Procter & Gamble stock. The stock has paid a dividend in each of the last 128 years. It maintains its “dividend aristocrat” status with 62 consecutive years of dividend increases.

If I’m going to buy a stock in this sector, I would choose Procter & Gamble. While KMB stock pays a slightly higher dividend and trades at a somewhat lower price-to-earnings ratio, it also struggles to maintain a positive stockholders’ equity. While I do not think KMB is in serious trouble, I would pay a slightly higher P/E for the stronger balance sheet.

The Bottom Line on PG Stock

Although Procter & Gamble stock continues to show a solid performance, struggles with revenue growth and a lack of movement in the stock price may PG an equity for dividend investors only.

A greater level of competition has put pressure on the entire consumer defensive sector. Now that more of these products can be purchased online, the inside track PG enjoyed with retailers has become less relevant. Name recognition has also become less meaningful as many consumers make buy decisions on price more often. The one bright spot in this stock remains its dividend. Even after 62 straight years of dividend increases, the stock maintains a dividend yield of about 3.5%.

However, unless one has reached a point in life where seeking stock price gains becomes too risky, I would avoid this stock and the sector in general. Many other sectors pay dividends as high while enjoying a better track record of stock price growth.

Although PG remains one of the best stocks in the industry, investors should seek stock market profits outside of Procter & Gamble and oustide of consumer defensive stocks in general.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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