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Procter & Gamble: A safe haven in a troubled environment?

Opdateret: for 1 dag siden

Throughout its 185 years of existence, Procter & Gamble has weathered numerous recessions, depressions, market crashes, wars, and other significant events since its establishment in 1837. Yet, the company is still alive and thriving. Thus, Procter & Gamble could be a stock to invest in, as we anticipate some macroeconomic headwinds in the near future. In this analysis, I will investigate whether now is the right time to buy Procter & Gamble.

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Procter & Gamble or any of their direct competitors. If you want to copy my portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal stake in Procter & Gamble, so it should not be difficult to maintain an unbiased analysis. If you want to purchase shares or fractional shares of Procter & Gamble, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Procter & Gamble is an American company that was founded in Cincinnati, Ohio in 1837. Procter & Gamble provides branded consumer goods worldwide, and its products can be purchased in over 170 countries. They have ten product categories divided into five different segments. The five segments are: Fabric & Home Care (35% of net sales), Baby, Feminine & Family Care (25% of net sales), Beauty (18% of net sales), Health Care (14% of net sales), and Grooming (8% of net sales). Their largest market is North America, which accounts for 50% of net sales. Europe follows with 21% of net sales, then Greater China with 9%, Asia Pacific with 8%, Latin America with 7%, and finally India, Middle East & Africa with 5% of net sales. It is a rather large company, making it the 16th largest holding in the S&P 500. While many people outside of the United States may not be familiar with Procter & Gamble, they are certainly aware of some of its brands. Some of their most famous brands include Pampers (baby diapers), Ariel (laundry products), Bounty (paper towels), Always (feminine care pads), Tampax (feminine care tampons), Gillette (razors and skincare), and Head & Shoulders (hair care). These brands all have high consumer confidence, which is what gives Procter & Gamble a brand moat.

Their CEO is Jon R. Moeller. He first joined Procter & Gamble in 1988 and became the CEO in 2021. Prior to becoming the CEO, he held various positions at Procter & Gamble, including Vice President and CFO. He holds a Bachelor of Science in Biology and a Master of Business Administration from Cornell University. Since Jon R. Moeller has only been CEO for a few years, it is difficult to determine whether he is a good CEO or not. However, he was chosen to be CEO because he has been credited with playing a significant role in developing strategies that have led to the growth and value creation of Procter & Gamble. In an interview with Goldman Sachs, he mentioned that his goal is not necessarily to take market share from competitors, but instead to grow the business by expanding the market through the introduction of new innovative products to consumers. He explains it in this quote: "When you can create new opportunities and create new sources of the delight for consumers and clients, good things happen. When all you are doing is trying to punch your competitor in the nose, not so good things happen." I find it quite refreshing to have such a perspective on competition and company growth. Jon R. Moeller hasn't been CEO long enough to be judged, but he does have extensive experience in the company and a fresh perspective on things. Hence, I wouldn't be opposed to investing in Procter & Gamble despite the unknowns.

I believe that Procter & Gamble has a strong brand moat. However, there are some uncertainties regarding the management. Now, let us investigate the numbers to determine if Procter & Gamble meets our criteria for a strong moat. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all numbers exceeding 10% in each year. Procter & Gamble has consistently delivered a strong return on invested capital (ROIC) over the years. There have been a few underwhelming years, but there have also been some very good years in between, especially the last three years. Overall, I would say that Procter & Gamble has delivered a satisfactory return on invested capital (ROIC) over the past ten years. If Procter & Gamble can continue to deliver numbers like they have done in the past three years, I would be very happy if I were invested in Procter & Gamble.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to share both the actual numbers and the year-over-year percentage growth. It is curious to see that Procter & Gamble peaked in 2014, and since then, its equity has dropped year over year. until 2021. There are several reasons for that. They have sold their brands to other companies. Examples of this include the sale of 43 beauty brands to Coty in 2015 and the sale of Duracell to Berkshire Hathaway in 2016. Furthermore, similar to many other companies, Procter & Gamble has used low-cost debt to buy back shares, which also affects the equity. It is worth noting that equity has grown in the past three years, which is encouraging to see.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Procter & Gamble has consistently generated strong free cash flow over the years. It is encouraging to note that the company's free cash flow has been higher in the last four years compared to previous years. Although there was a slight decrease in 2022, free cash flow growth picked up again in 2023. Levered free cash flow margin is also relatively stable, while the free cash flow yield in 2023 is the lowest it has been in the past ten years. The low free cash flow yield indicates that the stock is expensive, but we will discuss this further later.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing the total long-term debt by earnings. Doing the calculation on Procter & Gamble, I can see that the company has 1,70 years of earnings in debt. It is well within a manageable range, indicating that debt should not be a concern if you are contemplating investing in Procter & Gamble.

Based on my findings thus far, I believe that Procter & Gamble is a reputable company. However, no investment is without risk, and Procter & Gamble also carries some risks. One risk is macroeconomics. Uncertain economic conditions may adversely impact demand for Procter & Gamble products, as uncertainty in the economy results in lower consumer confidence. There are several factors that could cause some short-term pain for Procter & Gamble. One factor is higher energy costs due to geopolitical uncertainty. Another factor is that household saving levels have reduced, especially in Europe. Thus, slower economic growth, higher energy costs, and prolonged higher interest rates have an impact on consumer confidence. A strong U.S. dollar. Procter & Gamble generates 50% of its sales outside of North America while reporting in dollars. It means that a strong dollar will impact their results. The management expects that foreign exchange will have a headwind of approximately $1 billion after taxes in fiscal 2024. Thus, management has indicated that foreign exchange rates are expected to negatively impact earnings by seven percentage points in fiscal 2024. If interest rate cuts are not implemented in the United States, it could have a lasting impact on Procter & Gamble beyond fiscal 2024. Competition. In its annual report, Procter & Gamble mentions that it operates in a highly competitive market. It is not only towards other branded products but also private label products. If a recession occurs, some consumers may choose to purchase cheaper private label products instead of the more expensive branded ones. Management has mentioned that local competitors and companies denominated in currencies other than the US dollar do not face the same challenges in terms of foreign exchange due to the strength of the dollar.

There are also benefits if you decide to invest in Procter & Gamble. China. China is Procter & Gamble's largest market outside of the United States. Management believes that China continues to be an attractive place for them. They have mentioned that the Chinese retail environment is demanding, which generally plays to their strengths. Furthermore, they expect the Chinese market to return to mid-single-digit growth in the coming periods. They also see a lot of future potential as the number of middle-income consumers in China is expected to grow from 450 million to over 700 million in the next five years. Thus, they believe that their business in China can create significant value in the coming years.

Better productivity. In his letter to shareholders, CEO Jon R. Moeller mentioned how improved productivity will lead to growth in both revenue and profit, as well as an expansion in margins resulting from cost reduction. He mentioned that no area of costs is left untouched, and they plan to utilize digital tools and automation. Furthermore, he mentioned that they will continue to integrate data, analytics, and artificial intelligence to enhance the efficiency and effectiveness of their market investments. A Safe Dividend. Procter & Gamble has paid a dividend for 133 consecutive years and has increased its dividend for 67 consecutive years. It means that Procter & Gamble is one of the companies in the U.S. that has paid dividends for a long period of time. In fact, only seven companies have paid dividends for a longer period, and only three companies have increased their dividends for more consecutive years than Procter & Gamble.

Now it is time to calculate the price of shares in Procter & Gamble. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 5,90, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 7,5%. Management expects to achieve a growth rate of between 6% and 9% in fiscal year 2024. Additionally, I have chosen a projected future P/E ratio of 15, which is twice the growth rate. This decision is based on the fact that Procter & Gamble has historically had a higher price-to-earnings (P/E) ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $45,09. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Procter & Gamble at a price of $22,55 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 16.848 and capital expenditures were 3.062. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.143 in our calculations. The tax provision was 3.615. We have 2.356,866 outstanding shares. Hence, the calculation will be as follows: (16.848 – 2.143 + 3.615) / 2.356,866 x 10 = $77,73 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Procter & Gamble's Free Cash Flow Per Share at $5,85 and a growth rate of 7,5%, if you want to recoup your investment in 8 years, the Payback Time price is $65,69.

I believe that Procter & Gamble is an intriguing company that has the ability to thrive in any economic environment because they provide essential products to consumers. Procter & Gamble has a very strong brand moat and continues to gain market share, with 7 out of 10 of their categories winning market share in fiscal 2023. However, they are facing some short-term headwinds, such as lower consumer confidence due to macroeconomic factors and a stronger dollar. It has hurt earnings in fiscal year 2023 and is expected to continue to do so in fiscal year 2024. Nonetheless, these challenges are short-term and should eventually be resolved. In the meantime, investors in Procter & Gamble can collect what appears to be a secure dividend. Thus, Procter & Gamble seems to be a "sleep well at night" stock. Nonetheless, due to the market's uncertainty, I will still require a discount if I decide to invest in Procter & Gamble. Hence, I'm not interested in Procter & Gamble unless it reaches the Ten Cap price of $77,73.

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