As the markets look to transition away from high-growth names with expensive valuations to more reliable, defensive stocks during the past few months, companies like Procter & Gamble (PG) are attracting more attention.
Sustainable growth along with a proven product range and solid fundamentals make PG a first-class long-term choice. While 2022 is expected to bring a number of challenges, the latest earnings results inspire optimism.
Recent Financial Results
Procter & Gamble delivered strong results to close the fourth quarter of 2021. Earnings per share came in at $1.66 versus the $1.65 expected, while revenue reached $20.95 billion, beating Wall Street’s forecast by $610 million.
Even though PG’s mid-single-digit sales growth appears satisfying for a mature company in the consumer staples business, management warns that increasing commodity costs could negatively affect profitability into 2022. If inflation persists, margins are expected to contract going forward.
Sales growth is led by PG’s health segment, recording 8.4% year-over-year growth, followed by the Fabric & Home Care segment that reported revenue growth of 7.3%. Lagging in performance was the company’s Beauty segment, with 3.2% revenue growth.
Looking ahead, management remains cautiously optimistic, forecasting EPS growth of 3-6% in 2022, naming supply chain disruptions and elevated costs the biggest challenges moving forward. Along with competitors, PG is expected to announce measured price hikes across different products in 2022.
Stock Performance
Procter & Gamble’s stock has been on an almost uninterrupted uptrend for some time now. Despite a sharp decline when COVID-19 hit in early 2020, the recovery was swift, with PG making new highs since. Over the last five years, the stock has returned ~85%.
In more recent terms, trailing 12-month returns stand at around 25%, outperforming the market. With PG not experiencing large pullbacks, the stock carries a beta of just 0.45 (five-year monthly) that reiterates its defensive yet well-performing attributes.
Fundamentals and Valuation
Procter & Gamble markets its products in five distinct business segments: Beauty, Grooming, Health care, Fabric & Homecare, and Baby, Feminine & Family Care. Like most defensive stocks, demand for PG’s products is relatively inelastic, making the company a defensive choice that can increase protection against downside risk. Diversification across different product categories also adds to the appeal of PG.
The company continues to increase sales internationally, with China and the greater Asia region showing a lot of promise for expansion. E-commerce is also becoming a catalyst for financial performance; online revenue grew at an impressive 35% rate in Fiscal 2021.
Despite fierce domestic and international competition, Procter & Gamble has managed to uphold strong margins. A ~50% gross margin and ~18% net margin rank the company among the leaders in the Consumer Staples sector, while returns on assets and total capital also stand at double-digit rates. Cash flow generation remains unphased as cash from operations has grown from 12.8 billion in 2017 to almost 18 billion in the last 12 months.
A high-quality company like Procter & Gamble usually comes at a pricey valuation. While by most metrics that holds true, since a 28x P/E and a 5.2x P/S ratio are higher than market and sector averages, PG has a history of higher multiples. Dividend growth, low volatility, and a resilient business model attract a wide range of investors, especially during times of uncertainty.
Dividend Growth
By all accounts, PG presents an excellent choice for dividend growth investors. While the current yield of 2.2% might not impress, although significantly higher than the S&P average, its dividend history certainly does.
Uninterrupted distribution increases span over more than three decades, with Procter & Gamble’s dividends growing consistently at a 5%+ CAGR over the last decade. PG’s dividend is considered safe, supported by reliable cash flow generation.
Wall Street’s Take
Turning to Wall Street, Procter & Gamble has a Moderate Buy consensus rating based on eight Buys, four Holds, and no Sell ratings assigned in the last three months.
The average Procter & Gamble price target is $172.50, which represents 8.4% upside potential from current price levels, with a high forecast of $187 and a low forecast of $146.
Conclusion
With a low beta and predictable, defensive cash flows, PG stock is likely a suitable choice for long-term dividend growth investors despite short-term supply inflation headwinds.
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