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Procter & Gamble Will Remain a Value Creator
Posted by: Faisal Humayun (IP Logged)
Date: April 10, 2014 03:41PM

Procter & Gamble (PG) announced that it will be selling the bulk of its pet food business to Mars Inc for $2.9 billion. The rationale is to focus more on its personal care and cleaning brands. This article discusses the reasons for believing that P&G will remain a value creator, as it has been in the past.

Looking at the past, P&G has returned $88 billion of cash to shareholders in the last 10 years through dividends and share repurchase. Further, in terms of stock price, the company’s rolling 20-year returns have exceeded both the S&P 500 and the Dow Jones Industrial Average in 46 out of 48 periods, or 96% of the time.

Coming to the present, one of the biggest growth drivers for P&G will be emerging markets. P&G’s business can flourish in an environment where there is population growth along with rising income levels. This holds true for all emerging markets in Asia as well as emerging Africa. I believe this is where growth will come for P&G in the future. While the company has stated that it intends to use the cash proceeds from the pet business sale for general corporate purpose, I believe that a majority of the proceeds will flow into growing market share in emerging markets.

I have strong reasons to back my claim. For P&G, the net sales contribution from North America has declined to 39% in 2012 from 42% in 2009. During the same period, the net sales contribution from Asia has increased to 18% in 2012 from 15% in 2009. Over the next five to 10 years, this increasing sales trend for Asia will sustain, and this will keep the company’s overall revenue growth relatively robust.

Again, a look at the past trend in emerging markets tells us a lot about the impending potential in the markets. Not just for the next five to 10 years, growth in emerging markets can be sustained for a decade or two. In the last 10 years, net sales for P&G have grown at a CAGR of 23% in Brazil, 25% in Russia, 27% in India and 17% in China. It is clear that the company will focus on these markets with high double-digit growth. Even if growth in these markets moderates to the range of 10% to 15%, the impact on overall revenue will still drive value creation.

What works in P&G’s advantage is the fact that the company is already ahead of its peers in the emerging markets. As of 2012, P&G had sales of $33 billion in developing markets as compared to $24 billion for Unilever (UL) and $10 billion for Colgate (CL). This competitive edge over peers will sustain as P&G has product quality, innovation and has a significant marketing budget given its comfortable cash position.

In terms of positives, I also expect that P&G will witness an improvement in operating margin and it should add to overall shareholder value as the bottom line and EPS growth becomes more robust. The rationale for foreseeing an improvement in the operating margin is the $10 billion cost saving program undertaken by P&G, which is expected to conclude by 2016.

P&G has delivered 58 consecutive years of dividend increase. The stock currently trades at a dividend yield of 3%. Given the growth prospects in emerging markets, P&G will continue to increase dividends on an annual basis.

Another important perspective, which I want to add here, is the point that the U.S. market valuations might be stretched at current levels. In such a scenario, it makes sense to consider exposure to a relatively defensive sector and stock. P&G is likely to grow and sustain dividends even in a relatively sluggish economic environment. Investors can therefore consider P&G as a long-term value creator and also a safe-haven in times of overvaluation. My clear recommendation would be to buy and hold P&G.

Stocks Discussed: PG, UL, CL,
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