Ask the Rational Investor: P&G Cleans Up Your Portfolio
A well-diversified portfolio includes all industry sectors of an economy – technology, energy, industrials, consumer staples, and several others. Each sector responds differently to the wide array of factors influencing the market on any given day.
For example, energy stocks tend to perform better when the underlying commodity prices are rising. But, higher oil and gasoline prices negatively impact consumer discretionary income, which tends to reduce the sales and earnings of those stocks.
Well-balanced portfolios have less risk than those more concentrated and generate more consistent rates of returns.
Proctor & Gamble falls within the consumer staples sector, a sector that also includes companies such as Esté Lauder, Unilever, and Colgate. These companies are “non-cyclical” in that the products they sell see little impact from movements in the broader economy. For this reason, these stocks have historically offered relatively consistent performance through both booms and busts.
P&G is a business built on brand loyalty. Through the years, they have done a great job of cultivating this loyalty through product quality and consistency with brands such as Bounty, Tide, and Crest. This, in turn, is what allows P&G to charge a premium over their generic competitors, while also providing consistent financial results for shareholders.
Over the last five years, earnings per share have grown from $3.67 to $5.12 or about 7% per year. During the same period, P&G paid common dividends of $67 billion to share shareholders and repurchased stock worth almost $55 billion.
Recently, P&G has also shown strong discipline in managing its brand portfolio with an eye towards focusing on what they do best. This has resulted in the trimming of several less-profitable brands and products while shifting investment towards their mantra of “Constructive Disruption.” Results suggest the approach is working given the accelerating global market share and organic growth the company has seen over the last several years.
Wall Street analysts expect earnings growth trends to continue, in the range of mid-to-high single digits through 2024.
Although the current price-to-earnings (P/E) ratio of P&G is elevated compared to the last 10 years, the recent P/E expansion is less than the broad stock market has experienced, so on a relative basis to the broader stock market, the company looks less expensive.
Procter & Gamble may be an attractive long-term stock to add to your portfolio, considering the recent brand pruning, innovation driving growth, and a healthy, growing dividend of 2.3%. Many investors might find a dividend yield of over 2% enticing enough considering that corporate bonds, CD’s and money market accounts are close to zero!
Before making an investment decision in P&G, you should discuss the investment merits with your portfolio manager to decide if the investment is consistent with your overall goals and risk tolerance.
Sources: Company reports and presentations
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.