On Wednesday, Bloomberg published an article titled “P&G Is Under Investigation in Italian Tax Probe.” In it, the world’s largest consumer-products maker is being investigated for routing revenue through Swiss and other units to avoid paying taxes in the country. Joining the likes of Apple (AAPL, Financial), Google (GOOG, Financial) and Amazon (AMZN, Financial), P&G (PG, Financial) would, if guilty, probably need to pay a little bit more than what Google had paid. According to the article, Google was allegedly underpaying taxes totaling $277 million from 2009 and 2013, representing some 20% of Italy’s sales.
On average, Google made $4.4 billion in the U.K. in the aforementioned time frame. Identifying exact figures for Italy sales would be tricky. In comparison, P&G had 27% or $21.9 billion of its sales from Europe between 2013 and 2015. Interestingly, P&G stated in its 10-K that it did not have any individual country that had contributed to more than 10% of its total sales.
Playing with numbers and assumptions, P&G probably has been able to earn $93 per U.S. person. Data was assumed from having divided P&G’s total U.S. sales by total U.S. population in 2015. Using this markedly support-lacking and loosely derived sales per person value in Italy, P&G may have been able to sell no more than $5 billion in Italy alone, multiplying $93 with Italy’s total population in 2015. The $5 billion figure only represented 7% of P&G’s total sales, which is in line with the company’s statement that it did not have any country contributing more than 10% of its total sales. In summary, the $5 billion hypothetical total Italy sales figure for P&G in 2015 alone is obviously larger than that of Google’s $4.4 billion in its alleged tax underpayment over a longer, five-year period.
(P&G Brands, Company’s website)
A dividend aristocrat
P&G belongs to the group of stalwarts that had never faded away. It ranks with companies like Wal-Mart (WMT, Financial), Exxon Mobil (XOM, Financial) and AT&T (T, Financial) in a group called Dividend Aristocrats.
A company can only be part of Dividend Aristocrats only if it has an ongoing growing dividend for at least 25 years. This achievement exemplifies any of the included company’s excellence in running its business resulting to consistent dividend growth over time. P&G, on the other hand, has been growing its dividends for the past 59 years.
Inclusion in the Dividend Aristocrats group does not guarantee that a company would forever be a dividend grower, though. The list is continuously updated and sure enough those companies who do not meet the requirement will be dropped off the list.
P&G’s 10-year average dividend per share growth runs at 9%. The company grew its dividend by 6% in fiscal year 2015. Six percent seems not bad if one were to compare it to its peer Unilever, who achieved the same dividend growth but is not included in the Dividend Aristocrats list. In addition to its dividend commitments, P&G has been actively buying its shares for the past decade, spending roughly $134.9 billion in both share repurchases ($76 billion) and dividend payouts ($63 billion).
Despite these shareholder friendly activities demonstrated by P&G, Warren Buffett (Trades, Portfolio) traded his P&G shares to acquire Duracell instead in 2014. P&G approved the transaction since it was also looking forward to diversify its battery business during those periods. This transaction between the two giant companies, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) and P&G, was just completed in the first quarter of this year.
Given this event, did Buffett spot problems with P&G early on and decided that he wanted a 100% ownership in a slowly declining battery business rather than a payout provider, like P&G? P&G provided sub-3% dividend yields in fiscal year 2014.
According to the Duracell article mentioned earlier, Buffett seemed to never really intend to own P&G shares in the first place. Buffett’s Gillette shares back in 2005 were converted into P&G shares when the latter acquired the former for $57 billion. Nonetheless, reviewing some events in P&G in recent years may shed some light and demonstrate whether or not the consumer-products business may warrant an investment.
Company reevaluates business
“We know we haven’t been delivering lately and we need to bring our standards up,” said Procter & Gamble Co. Chief Executive David Taylor in early 2016. According to the Journal, sales growth has evaded P&G in the consumer-products business in emerging markets such as China.
P&G has experienced weak to declining sales growth for the past four years. Further, three CEOs have sat on P&G’s helm in the past four years. These executive changes included the return of A.G. Lafley, who was the company’s president and CEO from 2000 to 2009, in 2013. David Taylor, a P&G veteran with 36 years under his belt, replaced Lafley in November last year.
In recent years, P&G had cut more than 20,000 jobs since 2012 and sold off more than $20 billion in brands it considered outside its core focus. The company has been aiming to streamline its operations in order to focus on fewer, faster-growing brands such as Tide and Gillette.
In a June Wall Street Journal article, P&G announced that it was in the process of overhauling its bonus system for its managers. This step would give a "clearer line of sight between an individual’s responsibilities and their results and their compensation," said CFO Jon Moeller.
Nonetheless, money invested in P&G would have given an average annual total return of 9.64%, while the S&P 500 provided 13.54%.
Wall Street expectations
For the past eight quarters, P&G did not meet Wall Street’s sales number expectations 75% of the time. On the other hand, P&G surpassed Wall Street’s earnings-per-share expectations 63% of the time.
Most of the met expectations existed in recent two and five quarters for sales and earnings expectations, respectively. Interestingly, the overall trend for both sales and EPS are on a decline, signifying lower growth on both financial metrics.
Sales and earnings
In its recent first quarter performance compared to a year earlier, P&G had a 7% decline in growth, but an amazing 28% growth in profits that had resulted into 29% growth in the company’s EPS. This profit growth was mostly brought in by a $446 million earnings from discontinued operations.
Year-to-date, most analysts covering P&G improved their outlook on the company’s share price. Jefferies, Sterne Agee CRT and Stifel have labeled the company’s stock as a buy, while UBS and B. Riley & Co. remain neutral. Despite these bullish stances, average price for these analysts as of June 15 is $85 a share, which is at par as of today’s market price.
Book value, debt and cash
As of P&G’s recent quarter, the company has a book value of $21 a share. P&G has $13.8 billion in cash and $32.8 billion in debt, according to GuruFocus data. With a total shareholder equity of $59.8 billion, the company has a debt-to-equity ratio of 0.55.
In first quarter 2016, P&G delivered a free cash flow of $2.48 billion. The company also provided a net payout, share repurchase and dividends of $2.86 billion. This represented a 115% payout ratio, meaning the company was paying more than its cash flow to its shareholders. P&G also took in a fresh $1.7 billion net issuance of debt.
In its filing, P&G stated that it "expects to pay dividends of more than $7 billion, for a total of over $15 billion in dividend payments, share repurchases and share exchanges this fiscal year."
Currently, P&G is being valued at $228 billion. Using trailing-12 month data, P&G would have a PE ratio of 25 times. The company would also reflect a PB value ratio of 3.8 times, and a PS ratio of 3.2 times. The S&P 500, on the other hand, has a PE of 19 times and PB of 2.7 times.
P&G clearly demonstrated difficulty in growing its sales over the years, and it has not shown a turnaround just yet. Selling businesses should provide a good one-time positive in its bottom-line. Add in some tax troubles (allegedly) overseas may hamper its endeavors for the turnaround. Nonetheless, the company can be as good and valuable to its current shareholders as can be observed in its dividend and share repurchasing activities. These shareholder friendly actions, accompanied by its status as a Dividend Aristocrat, may be the only reason why the company is currently being valued at a good premium compared to the overall market.
Disclosure: I do not have shares in P&G nor do I plan to initiate a long position anytime in the next week or two.
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