Over the past decade it was difficult to find any investors who bragged about buying into companies which were too big, too slow and too cautious when it came to delivering growth. Rather, shares of young technology giants were all the rage as they powered an unprecedented US bull market run.
But when uncertainty rules and it’s difficult to know what lies ahead, a different sort of investing perspective is required. Highly cyclical growth stocks suffer the most in this environment, while slow-moving consumer staple stocks outperform.
Procter & Gamble (NYSE:PG), the multinational consumer staple manufacturer, is a stock we recommend when volatility drives markets and investors would prefer slow but steady capital growth with regular dividend payments. Since we first recommended P&G to readers on May 28, its shares have surged 29%. The stock is now trading at $92.77, close to its 52-week high of $96.89.
During the past six months, when volatility spiked in financial markets and the sell-off in high-growth, cyclical stocks accelerated, shares of Procter & Gamble have clearly been a top choice for investors in search of stability. The stock’s outperformance is also a good reminder that it’s prudent to always balance one’s portfolio by including some solid income stocks that are generally immune to market gyrations and perform better during times of distress.
Turnaround Delivering Results
If you’re ready to make this bet, even with shares trading just 4% below their 52-week high, the timing still seems right to acquire the stock of the world’s largest consumer product company on signs that its turnaround strategy has started to pay off. P&G owns some of the world’s best-known consumer brands, including Bounty paper towels, Gillette razors, and Tide laundry detergent.
This portfolio of leading businesses generated more than $65 billion in annual sales last year and 22% in core operating margins, which is among the highest in the industry. Given their dominant position, the biggest challenge P&G has faced was reversing the trend of slowing sales growth amid changing consumer preferences.
Over the past five years, as part of its turnaround strategy, Procter and Gamble pruned its brand roster from 175 to 65, focusing on the 10 product categories where the margins are highest. As part of that process, the company also eliminated 34,000 jobs through a combination of brand sales and buyouts, as well as plant closures—slashing more than $10 billion in corporate costs.
But investors, led by billionaire activist investor Nelson Peltz, want the company’s turnaround efforts to be even more aggressive. Chief Executive Officer David Taylor has responded by buying new businesses and introducing greener versions of existing products such as the company’s new Pampers Pure Protection line. In the most recent quarterly results, P&G showed its plan is working.
The company’s organic growth in Q1, which exclude items like acquisitions and currency effects, rose 4%, P&G said in October, more than double the gain projected by analysts. Procter & Gamble’s unexpectedly strong performance in the quarter was fueled by its growth in US markets, which was led by brands such as Olay and the new SK-II luxury skin cream, already popular in Asia.
The momentum in P&G’s turnaround is prompting some bears to change their view on the stock with some bullish calls from top investment banks. Morgan Stanley analysts last week upgraded the consumer group to overweight from equal weight and boosted their price target on the stock by $15 to to $106 a share.
In a note to clients the bank’s analyst wrote:
“Broad-based market share momentum, an improving gross margin outlook, and greater earnings achievability are not adequately reflected in relative valuation verses peers.”
P&G is valued at 25 times trailing twelve month earnings, versus Colgate-Palmolive’s (NYSE:CL) multiple of 26.
Procter & Gamble is one of the largest dividend payers in the sector, with a payout track record going back to the past century. The maker of Dawn dish soap and Crest toothpaste has hiked its dividend for 61 consecutive years; and over the past 127 years it never stopped paying dividends no matter economic conditions.
With a current dividend yield of just a hair under 3%, P&G stock is the perfect candidate for long-term, buy-and-hold investors. The company’s growth is accelerating after a number of sluggish years and we believe shares still have room to run.