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

Opdateret: 7. aug.


Through its 185 years of existence, Procter & Gamble has survived several recessions, depressions, market crashes, wars, and whatever else has happened since 1837. Yet, the company is still alive and well and has significantly outperformed the S&P 500 in 2022. Thus, Procter & Gamble could be a stock to invest in, as we expect 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 very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.



Procter & Gamble is an American company that was founded in Cincinnati, Ohio in 1837. Procter & Gamble providesbranded consumer goods worldwide, and its products can be purchased in more than 170 countries. They have ten productcategories that are 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), andGrooming (8% of net sales). Their largest market is North America, accounting for 49% of net sales, followed by Europe (21% of net sales), Greater China (10% of net sales), Asia Pacific (8% of net sales), Latin America (6% of net sales), andIndia, Middle East & Africa (6% of net sales). It is a rather large company, making it the 13th 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 their 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 becomingthe CEO, he held various positions in Procter & Gamble, such as Vice President and CFO. He has a Bachelor of Sciencein Biology and a Master of Business Administration from Cornell University. Since Jon R. Moeller has only been CEOfor a year, it is hard to determine if he is a good CEO or not. However, the reason he was chosen to be CEO was because he has been credited for being a large part of developing strategies that have resulted in 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 shares 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 think it is quite refreshing to have such a view on competition and how to grow the company. Jon R. Moeller hasn't been CEO long enough to be judged, but he does have vast experience in the company and a refreshing view of 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 see if Procter & Gamble lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.


The first number we will investigate is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all years. Procter & Gamble has delivered solid numbers over the years. There have been a few underwhelming years, but there have also been some very good years in between, especially the last two years. Overall, I would say that Procter & Gamble has delivered an acceptable return on invested capital (ROIC). If they can continue to deliver numbers like these, I would be a satisfied investor, assuming I had 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 moving forward. As you are accustomed to seeing numbers in percentage form, I have decided to share both the actualnumbers and the year-over-year percentage growth. It is curious to see that Procter & Gamble peaked in 2014 and since then, equity has dropped year over year. There are several reasons for that. They have sold brands to other companies. Examples of this include selling 43 beauty brands to Coty in 2015 and selling Duracell to Berkshire Hathaway in 2016.Furthermore, like many other companies, Procter & Gamble has utilized inexpensive debt to repurchase shares, which also impacts the equity.



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 the margin 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 a 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 three years compared to previous years, although there was a slight decrease in 2022. Levered free cash flow margin is also relatively stable, while the free cash flow yield in 2022 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 that later.



Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings.Doing the calculation on Procter & Gamble, I can see that Procter & Gamble has 1,58 years of earnings in debt. It is well within range, meaning that debt isn't an issue if you are considering investing in Procter & Gamble.


Based on my findings thus far, I believe that Procter & Gamble is a reputable company. However, no investments are without risk, and Procter & Gamble also has some risks. One risk is higher prices for raw materials and freight. Procter & Gamble must deal with higher prices for raw materials and freight. In their earnings call in fiscal Q1 2023, managementmentioned that these higher prices resulted in a 550 basis point decrease in gross profit margins. Hence, if these prices continue to stay elevated, it will affect the profitability of Procter & Gamble. Management mentioned in the same earnings call that raw material prices have remained high, and while freight prices have eased a bit, they are still higher than usual. A strong U.S. dollar. Procter & Gamble generates 51% of its sales outside of North America, while reporting in dollars. It means that a strong dollar will impact their results. In the earnings call for fiscal Q1 2023, management mentioned that,based on the current exchange rates, the strong dollar will have a $1,3 billion after-tax impact on their results in fiscal 2023. 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 opt for cheaper private labels instead of the pricier branded labels. Furthermore, during the earnings call in fiscal Q1 2023, management mentioned that local competitors and non-US dollar denominated companies do not face the same challenges in terms of foreign exchange due to the strength of the dollar.


There are also positives if you decide to invest in Procter & Gamble. China is shifting away from its zero-tolerance COVID policy. Sales in Greater China decreased in the first quarter of fiscal year 2023. Management mentioned that this decline is due to the impact of COVID lockdowns and the subsequent weak consumer confidence. Since then, we have received the news that China has fully opened, which means that the greater China market should soon return to growth.Management also seems confident in the Greater China market, as they mentioned in the earnings call that they expect China to return to strong underlying growth rates.. 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 due to 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 make their market investments more efficient and effective. A Safe Dividend. Procter & Gamble has paid a dividend for 132 consecutive years and has increased its dividend for 66 consecutive years. It means that only seven companies in the U.S. have paid dividends for a longer period of time, and only three companies have increased their dividends for more consecutive years.



All right, we have gone through the numbers, potential, and risk regarding Microsoft, and now it is time for us to calculate a price for Microsoft. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here. I chose an estimated future EPS growth rate of 4% (management expects it to grow between 3-5%), an estimated future PE of 8 (which is double the growth rate, as the historical PE for Procter & Gamble has been higher), and we already have the minimum acceptable return rate of 15%. Doing the calculations, we arrive at the sticker price (also known as fair value or intrinsic value) of $16,68. We want to have a margin of safety of 50%, we will divide it by 2. This means that we want to buy Proctor & Gamble at a price of $8,34 (or lower of course), if we use the Margin of Safety price.


Our second method for calculating a purchase price is the Ten Cap price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financials. Keep in mind that all numbers are in millions. The operating cash flow last year was 16.150. The capital expenditures were 2.955. I tried to look through their annual report to see how much of the capital expenditures were used on maintenance. I couldn't find it, though. As a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 2.068,5 in our further calculations. The tax provision was 3.327. We have 2.369,697 outstanding shares. Hence, the calculation will be like this: (16.150 - 2.068,5 + 3.327) / 2.369,697 x 10 = $73,46 in Ten Cap price.


The final calculation is the Payback Time. I also described in "MY STRATEGY". With Proctor & Gamble's Free Cash Flow Per Share at 5,65 and a growth rate of 4%, if you want to recoup your investment in 8 years, the Payback Time price is $54,14.


I believe that Procter & Gamble is an intriguing company that has the ability to thrive in any economic environment, as they provide essential products to consumers. Procter & Gamble has a very strong brand moat and continues to gainmarket share, with 9 out of 10 of their categories winning market share in fiscal 2022. However, they are facing some short-term headwinds, including higher prices on raw materials and freight, as well as a stronger dollar. It has hurt margins in fiscal 2022, resulting in the lowest free cash flow yield we have seen in 10 years. Nonetheless, these challenges are short-term and should eventually resolve. In the meantime, investors in Procter & Gamble can collect what appears to be a safe dividend. Personally, I would like to see a higher free cash flow yield before considering an investment in Procter & Gamble. Therefore, I have decided not to invest in Procter & Gamble at this time, despite recognizing it as a great company.


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