With blue chips like Procter & Gamble (PG), PepsiCo (PEP), and Microsoft (MSFT), one argument that I often hear is that these companies are great, but that investors looking at them today have missed the growth of decades past. Roberto Goizueta, the CEO of the Coca-Cola Company (KO) from 1980-1997, used to have an article that he showed analysts when the question of "how much longer can it last?" came up. It read:
"Several times every year a weighty and serious investor looks long and with a profound respect at Coca-Cola's record but comes regretfully to the conclusion that he is looking too late."
That quote, as Goizueta would proudly point out, was from an article in Fortune Magazine - written in December of 1938.
In 1837, two gentlemen by the names of William Procter (a candle maker) and James Gamble (a soap maker) became business partners, starting a company called Procter & Gamble to compete against 14 other soap & candle makers in Cincinnati, Ohio at the time. In the 175 years since the company was born, it has lived through times of unprecedented financial and historical context, including the Civil War, The Great Depression, The Great Recession, and everything in-between; throughout that time, the company has continued to grow and prosper, on the back of one key tenant: improving consumers’ lives through innovation.
In that time, the company has lived up to the goal, through products like Tide laundry detergent (1946), Crest fluoride toothpaste (1955), Pampers disposable diapers (1961), Pringles stackable potato chips (1968), Pert (the first 2-in-1 shampoo/conditioner, in 1986), Febreeze, and Swifter (both in 1998), to name but a few; this is the heart of P&G, and continues to drive the business.
Here is how CEO Bob McDonald put it at the company’s most recent annual shareholder meeting:
“At the heart of everything we do is an unrelenting focus on innovation. Innovation is the primary way we fulfill our purpose. It’s the driving force behind our strategy as it always has been at P&G… promotions may win a quarter here and there, but innovation wins decades.” This is more than just talk: The company currently invests about $2 billion per year in research and development, roughly 60% more than their next closest competitor, and more than most of their competitors combined; this lead to the launch of 8 out of the 25 most successful new products in the industry in the United States in the past year (with Crest 3D White taking the gold medal).
As I noted in an article last Friday, the company is currently facing a difficult combination of increasing commodity costs and stubborn competitors, who are willing to hold prices steady in the hopes of grabbing market share. This has been met with a slew of analyst downgrades, notably from UBS, BMO Capital, and Morgan Stanley in the past week.
Here is what Nik Modi, the analyst covering Procter & Gamble for UBS, had to say:
“P&G is the company that investors look towards to absorb volatility instead of falling victim to it. From where we sit today, it is hard to see how the next one to two years will [be] any different than the last five.”
I’m not sure what Nik means by volatility (the company can’t control its own stock price…), but I can agree with one thing he said: It’s hard to see how the coming years will be different than the last five (when the dividend increased 11.4% per annum), or even fifty (when the dividend increased roughly 9.5% per annum).
The consensus is far from rosy for P&G, especially for people (I can't call them investors) who are only concerned with EPS over the next four quarters; on the other hand, if you’re searching for a great business at a reasonable price, and with the potential to grow substantially in emerging markets over the coming decades, look no further than Procter & Gamble.
Thankfully, most analysts are concerned about next quarter and (maybe) next year, but not the next decade; for investors looking to profit on short-term noise, pray those downgrades keep coming!
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.