Where will Procter & Gamble be in 5 years?

Procter & Gamble‘s (NYSE: PG) the stock has risen by around 10% in the past 12 months, outperforming the S&P 500is down 0.8% over the same period. As the COVID-19 pandemic spread, consumers bought more P&G $ 1 billion brands – including Bounty, Charmin, Crest, Head & Shoulders, Gillette, Pampers, Pringles and Tide – as they were bracing for extended shutdowns and social distancing measures.

This steady demand, along with a 64-year streak of annual dividend hikes, has made P&G a good defensive game in a volatile market. The stock has also generated a 70% total return over the past five years, making it a good long-term investment. But can he keep that momentum going over the next five years?

Image source: Getty Images.

Understanding P&G Business

P&G divides its business into five segments: beauty (19% of its sales last year), beauty care (9%), health care (12%), fabrics and home care (33%) and personal care products. for babies, women and families (26%). He significantly reduced his beauty unit when selling his specialist beauty business to Coty (NYSE: COTY) end of 2016.

P&G has traditionally faced three main challenges: competition from generic brands and private labels, weaker brands offsetting stronger ones, and currency headwinds. Nonetheless, P & G’s organic sales and core EPS – which excludes acquisitions, divestitures and currency changes – have remained broadly stable over the past five years. Regular buybacks have also supported the growth of its EPS and tightened its valuations:

Growth (YOY)

2015

2016

2017

2018

2019

Organic sales

1%

1%

2%

1%

5%

Basic currency neutral EPS

11%

(8%)

11%

6%

15%

Source: P&G annual reports.

P & G’s grooming business, which faces intense competition from competitors such as Unilever‘s (NYSE: UL) Dollar shave club, has been a weak link throughout the first three quarters of fiscal 2020. The beauty sector has also struggled, particularly in its stronger Asian markets, as the pandemic disrupted the travel and retail sectors. retail.

However, P&G still expects its organic sales to increase 4% to 5% for the full year, which ends June 29, and its core EPS to increase 8% to 11%. Therefore, the strength of its other three businesses – which include essential consumer staples like toilet paper, paper towels, diapers and cleaning supplies – would likely make up for the weakness in its grooming and beauty businesses. . P&G also recently increased its dividend by 6%.

P & G’s clear directions and rising dividends indicated that its business was still buzzing, as other companies retracted their forecasts and cut or suspended their dividends. P & G’s forward P / E of 23 looks a bit high relative to its growth, but the strength of its core brands, strong cash flow and clear directions arguably justifies the premium.

What about the next five years?

P&G doesn’t have much room to grow since its products are already sold in over 180 countries, but it will likely continue to buy hot brands and get rid of weaker ones. It will expand its stronger brands, like SK-II in Asia, and continue to cut costs as it crosses the midpoint of its second five-year, $ 10 billion productivity program.

An SK-II advertisement.

Image source: P&G.

Over the past 12 months, P&G has spent 68% and 22% of its free cash flow on redemptions and dividends, respectively. This trend is expected to continue over the next five years. P&G will likely continue to generate organic single-digit sales growth over the next several years, with cost-cutting measures and buybacks increasing its core EPS.

Investors should still take Wall Street’s long-term forecast with a grain of salt, but analysts currently expect P&G to increase annual profits at an average rate of 7.5% over the next five years. This forecast gives P&G a 5-year lead time PEG ratio of 3.0, which is not cheap – a PEG ratio of less than 1.0 is considered undervalued.

However, this ratio remains in line with those of its industry peers: Unilever has a slightly lower ratio of 2.2, while Kimberly clark (NYSE: KMB) – a more direct beneficiary of the scramble for toilet paper, facial tissues and other paper products – has a much higher ratio of 4.9.

Market interest in P&G, Unilever and Kimberly Clark could cool after the COVID-19 crisis ends, but they could still be popular defensive actions if the pandemic triggers a global recession. In other words, I fully expect from P&G and his peers gradually climb higher – and possibly outperform the S&P 500 again – over the next five years.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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