Thesis: Procter & Gamble Shows Excellence In Capital Allocation, Beyond CPG Industry Volatility
The Procter & Gamble Company (NYSE:PG) is a global leader in the Consumer Packaged Goods (CPG) category. While I believe P&G is a good innovator in CPG, the overall category is mature, and short-term challenges are to be expected. These include cyclical decreases in consumer demand, foreign currencies fluctuation and more broadly the fight to avoid commoditization and price wars. I will cover these challenges in more detail in the article.
Where P&G truly shines is in allocating capital to reward shareholders. Over the past two years, P&G has invested more than $10 billion in share buybacks. Additionally, the company is a dividend king, having increased its dividend for 67 consecutive years. In my opinion, this makes P&G a great long-term hold, despite the short-term challenges in the CPG category.
While P&G's stock has lagged behind the market for the past 10 years, I think it's an excellent hold for investors who want to limit volatility in their portfolio or focus on dividends.
P&G Is Excellent At Allocating Capital To Reward Shareholders
I believe P&G is a leader at innovating the CPG category, something I will cover later in this article. However, I think that P&G really shines in allocating capital to reward shareholders. The company has repurchased more than $10 Billion worth of stock since September 2022.
Looking at shares outstanding in the last 14 years shows just how effective P&G has been at allocating capital. The company has reduced its shares count by almost one third. This is the result of a steady number of shares buyback. Except for 2020, the company has always decreased the number of shares outstanding in the past 14 years.
Another way that P&G rewards shareholders is by distributing an ever-increasing dividend. The company is a dividend king, having raised its yearly dividend for the past 67 years. While the dividend history of P&G is impressive, I think this is mostly a signal that management is giving to investors about how shareholder centric the company is. The dividend yield at the time of writing, at 2.44%, is hardly enough to justify adding PG to one's portfolio. We are still in a high interest rate environment and a yield of below 3% is not enticing per se.
The company has driven most of its returns for shareholders by way of stock appreciation. This is also a function of stock buybacks. What's truly impressive, in my view, is that Procter & Gamble has returned $145 Billion in the last 10 years when accounting for both dividends and stock buybacks.
P&G's Financial Performance And Why Headwinds Are To Be Expected In The Short Term
P&G has had solid results in the past 5 years. Since 2020, the company has managed to steadily grow Revenue by more than 20% and EPS by a whopping 41%.
However, the latest results for Q2 of Fiscal Year 2024 reveal that headwinds are to be expected in the short term.
P&G is not growing volumes in any category except grooming, at a mere 1%. The effect of foreign exchange is also negative on all its segments except Health Care. It is only thanks to up-pricing that Net Sales for the company have managed to grow by 3% overall.
The relative lack of growth in sales has been explained to shareholders during the presentation as being driven by sales in Greater China. Overall sales in the region have been declining 15%. More importantly, sales of premium, highly profitable Beauty brand SK-II saw a whopping 34% decrease in sales.
Roughly half of P&G's sales are generated outside of the USA. Naturally, the company is heavily exposed to fluctuations in foreign currencies and global consumer demand. This is especially valid considering that P&G tends to play with a focus on product superiority, which often translates into premium products that grant the company more pricing power.
A slowdown in the Chinese business has already been recorded by P&G last quarter. I do expect that
The CPG Category And The Battle To Fight Commoditization: P&G Is A Winner
The CPG category overall is projected to be growing at a 5% CAGR in terms of sales until 2031. As a mature category, CPG products tend to be mostly sold with a heavy focus on pricing. A 2021 McKinsey study shows that 28% to 50% of retail volumes are based on promotions.
A 2023 study by consultancy firm BCG has found that 80% of surveyed companies in the CPG category are either in the "stagnant" or "emerging" categories. This means they are experiencing low short term EBIT growth and limited five-year shareholder returns.
The picture that emerges from these data points is that P&G plays in a category that is fairly price sensitive and stagnating in terms of volumes, revenue and profitability. This results in CPG players heavily competing on price.
For a company that operates in such a price-sensitive category, it's remarkable how P&G leverages pricing to offset volume declines and the impact of foreign currency exchange rates. This shows that P&G is a winner, and its strategy of focusing on superior products is working. I consider this the "moat" of the company.
Two clear examples of P&G's successful product strategy are in Fabric Care and Gillette, part of its grooming business. With Gillette, P&G re-established the brand as a category leader despite the trend towards beards over clean shaving. The company embraced this trend, launching new products that appealed to younger generations and offered superior value compared to competitors.
In Fabric Care, P&G turned a stagnant category into a growth area by inventing a new product - the laundry pod. Both examples highlight a common theme: when facing industry challenges, P&G focused on enhancing consumer experience and delivering products that offer superior value.
Overall, I expect P&G to face continued short-term headwinds, which is typical given the nature of its business. However, long-term investors shouldn't worry. P&G has consistently rewarded shareholders through smart capital allocation and has shown resilience to short-term industry challenges.
Is P&G Beating The Market? It Depends On Who You Ask, But It Doesn't Matter If You Understand The Role Of This Stock In A Portfolio
In P&G's 2023 financial report, management is taking pride in their company's stock performance. Page 23 and 24 of the 88-page report are dedicated to how the company has performed when compared to the S&P 500.
While I find P&G's results in the last 5 years remarkable, adopting a broader time horizon tells a different story. P&G has underperformed the S&P 500 since 2014. The company even underperformed direct competitor Church & Dwight Co. (CHD) during that time frame, which has actually managed to beat the market over the longer term.
P&G's relative underperformance compared to the market doesn't matter, in my view. Given that P&G operates in a very mature category, expecting the stock to outperform the market isn't realistic.
I believe that what P&G excels at is rewarding shareholders and tackling long-term challenges in the CPG space. For investors aiming to reduce portfolio volatility or build a dividend-focused portfolio, P&G is an excellent long-term hold.
Risks To My Thesis
The main risk with my thesis is that P&G could lose its "moat", and stop being able to innovate and face long-term headwinds in the CPG space. If that were to happen, the company could start losing ground to competitors.
In such a scenario, P&G might be unable to continue raising its dividend or performing stock buybacks, even though the current payout ratio is just 60%, making the dividend seem safe for now.
Another risk involves the overall CPG category. As discussed, this is a relatively stagnant category, heavily dependent on global consumer demand. If consumer demand were to fall significantly for an extended period, P&G would face strong headwinds in the foreseeable future.
Conclusion
P&G is an excellent company at allocating resources to reward shareholders. In the last 10 years, it has distributed more than $145 Billion between dividends and stock buybacks. On top, the company is also great at weathering any challenges it faces in the CPG category by focusing on delivering superior products to consumers. I rate P&G a "BUY", because of these two reasons.
These two elements make P&G an easy choice for anyone building a dividend portfolio or simply looking at reducing volatility.
Geneva Investor
Individual investor based in Geneva, Switzerland. Follow me on X for daily macro & investing nuggets. I write about macroeconomics, global trends, adopting a long-term, multi-generational strategy. I have a Master's degree in Business Management and I provide insights on companies poised to create generational wealth. Currently bullish on PLTR, US equities, MSTR and Bitcoin. Friend "Rex Investing" is also a contributor to Seeking Alpha. All opinions and analysis are exclusively my own.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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