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Is Procter & Gamble a Buy?

August 30, 2013 | About:
Today I'm going to take a look at the Cincinnati based consumer product juggernaut that is Procter and Gamble. I have been an owner for several year, but from time to time it's important for every investor to review their holdings and make sure that the companies are still worth owning. As "they" say the only thing constant in this world is change. So today we're going to take a look at Procter and Gamble, and see how it's business is doing.

P&G is a worldwide corporation with a range of personal product brands we all recognize like Braun, Dawn, Gillete, Head and Shoulders, Febereze, Duracell, Iams, Vicks, Oral-B, Bounty, Charmin, Pampers, etc. The company was founded in 1837 and has grown to become a worldwide company selling products in 180 companies today. At first glance the company is not cheap, currently selling with a price-to-earnings (PE) ratio of 20, price-to-book (P/B) ratio of 3.2, and a price-to-earnings-to-growth (PEG) ratio of 2.2. These levels seem expensive, but lets dig a little deeper and see if we get what we're (potentially) paying for.

One of my favorite metrics is return on equity (ROE). I want to be sure that the companies I own generating a high rate of return on my equity ownership in the company. You can see the past 10 years of ROE for Procter & Gamble below.



I consider these results underwhelming. While they are consistent since 2007, I generally like to see ROEs of at least 20%. My next focus is being sure a large "mature" business such as P&G can grow, by which I mean grow sales and profits, enough to make an investment worthwhile. Below you can see the revenue growth per share over the past 10 years.



Ok, good, so P&G has been able to nearly double it's revenue per share over the past 10 years. Now let's see if the Earnings-per-Share (EPS) and Free-Cash-Flow per Share (FCF) have been growing as quickly as revenue.



From the left side of the table above it's clear that the EPS and FCF have not been growing as quickly as the Revenue-per-Share, which has hampered profitability. This is likely the impact of cost inflation, which the company has found difficult to pass on to the end consumer.

Also in the table above is my discount cash flow analysis of P&Gs valuation. Based on the historic (10 year) growth rate (assumed to be the slower of EPS and FCF) of 5%, this method of valuation is not likely to indicate P&G is a great buy. The reason is because I always discount my future earnings expectations at 5% per year, to account for the risk above and beyond "safe" investments. As a result of both the assumed growth rate and discount rate being the same (5%), future earnings growth don't really give the valuation any kick.

Based on this valuation P&G's future earnings have a valuation of $64, which is below the current stock price. This company could become a better investment if it began to grow at a faster rate or demonstrate improved pricing power. Dividend increases will likely have to slow down or moderate in the future, because the current dividend payout ratio is 59%, another warning sign for me.

In summary, P&G has turned out to be a mediocre investment for me. I will keep my current shares, but will not reinvest the dividends in additional P&G shares.

Disclosure: I own P&G. This analysis is for informational purposes only and should not be considered a recommendation to buy, sell, or hold any equities. The information above is provided by Gurufocus.com

About the author:

The Fast Letter
The Fast Weekly (fastweekly.blogspot.com) is a blog that discusses where I am finding opportunity in the markets and how I am capitalizing on those opportunities. I also include stories about me and my family, books I found useful, and important investment decisions.

Visit The Fast Letter's Website


Rating: 3.3/5 (7 votes)

Comments

pravchaw
Pravchaw premium member - 7 months ago
Thanks. What is the basis of this hurdle. " _
Fast Weekly
Fast Weekly - 7 months ago
Pravchaw,

I am not sure I understand your question. Could you elaborate? Thanks for taking the time to comment.

Please leave your comment:


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