Driven by strong sales in its beauty and fabric and home care businesses, consumer goods giant Procter & Gamble Co. (PG, Financial) reported better-than-expected third-quarter results on Thursday.
The Cincinnati-based company posted adjusted earnings per share of $1, topping Thomson Reuters’ estimates of 98 cents. Quarterly revenue grew 4.3% from the prior-year quarter to $16.28 billion, beating expectations of $16.21 billion.
The largest contributors to revenue performance were P&G’s beauty and fabric and home care segments. Net sales in its beauty business grew 10%, boosted by the Olay and SK-II skin care brands. The fabric and home care segment, which includes brands like Tide laundry detergent, Swiffer dust mops and Cascade dish soap, saw net sales increase 6%.
Chairman, President and CEO David Taylor commented on the company’s performance, noting it had delivered “modest” growth in a “challenging macro environment.”
“We have large businesses in several difficult markets,” he said. “The ecosystems in which we operate around the world are being disrupted and transformed. We will change at an even faster rate -- winning through superiority, cost and cash productivity and a strengthened organization and culture.”
Acquisition
Despite the beat, Procter & Gamble’s shares fell nearly 2% in premarket trading after the company announced it is buying Merck KGaA's (MKGAF, Financial) consumer health business for 3.4 billion euros ($4.2 billion).
In addition to gaining vitamin brands like Seven Seas, Femibion and Neurobion, as well as other over-the-counter health care products, Procter & Gamble will also increase its exposure to the Latin American and Asian markets through this acquisiton.
In a statement, Tom Finn, president of P&G Global Personal Health Care, emphasized that Merck KGaA’s brands will complement its existing portfolio well.
“This acquisition helps us continue to drive sales and profit growth for P&G by providing the capabilities and portfolio scale we need to operate a winning global OTC business on our own, without the aid of a health care partner,” he said.
That sentiment was echoed by Stefan Oschmann, chairman and CEO of Merck KGaA.
“Consumer Health is a strong business that deserves the best possible opportunities for its future development,” he said. “With P&G we have found a strong, highly recognized player who has the necessary scale to successfully drive the business going forward.”
According to CNBC, the deal is P&G’s first major acquisition since activist investor Nelson Peltz joined its board in March. The investor is concerned that the company’s structure is too complex, innovation is too slow and financial planning is too conservative.
As a result of the deal, P&G will also be ending its joint venture with Teva Pharmaceutical Industries (TEVA, Financial), which is PGT Healthcare, on July 1. The company said the breakup is mutual as the joint venture no longer aligns with their respective goals.
The companies are expecting the deal to close in the 2018-19 fiscal year.
Guidance and dividends
Looking ahead, P&G maintained its organic sales growth guidance for full-year 2018, which is 2% to 3%. It also narrowed its earnings per share outlook for the year to a range of 6% to 8%. It was previously 5% to 8%.
Earlier this month, the company increased its quarterly dividend by 4%, marking the 62nd consecutive year it has increased dividends. Procter & Gamble has a trailing dividend yield of 3.53%, which GuruFocus says is close to a 10-year high, and a dividend payout ratio of 0.73, falling from a high of 0.91 in 2015.
Stock price
With a market cap of $190.29 billion, Procter & Gamble’s shares were trading around $75.47, down approximately 2.65%, on Thursday morning. GuruFocus estimates the stock has lost 17% year to date.
Of the gurus invested in Procter & Gamble, Donald Yacktman (Trades, Portfolio)’s Yacktman Asset Management has the largest position with 0.6% of outstanding shares. Other guru shareholders include Ken Fisher (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Jim Simons (Trades, Portfolio), Dodge & Cox, Mairs and Power (Trades, Portfolio) and Warren Buffett (Trades, Portfolio).
Disclosure: No positions.
