Source: PaxForex Premium Analytics Portal, Fundamental Insight
There's no denying that over its long history, Procter & Gamble has helped many investors capitalize sufficiently. The stock price has risen nearly 6,000% since the 1980s when P&G was at its height. The company's impressive history speaks volumes.
But as the old saying goes, past performance is no guarantee of future results. It's P&G's incredible past that makes it a not-so-interesting prospect for investors looking to build a million-dollar portfolio now.
You probably know this company even better than you think. Procter & Gamble is the name behind Tide laundry detergent, Bounty paper towels, Gillette razors, and Head & Shoulders shampoo, to name a few of its multi-billion dollar brands. Indeed, it is the biggest name in the consumer products business by revenue, with sales of $80.2 billion in the fiscal year that ended in June. The next biggest competitor is Unilever, but that company has annual sales of only about $56 billion.
There are several obvious advantages to being the biggest name in any business. One is P&G's influence on the retailers who sell its products to consumers. Another is the raw marketing power. Depending on the year, big-money P&G may be the biggest advertiser in the world, which helps maintain and even increase its market share.
But there are downsides to being the biggest name in any business. These include complicated logistics and the risk of being so massive that smaller niche players can shake up your customer base. For example, subscription shaving supply companies like Harry's and Edgewell's Billie, which P&G wanted to acquire just a couple of years ago, have gained popularity that seemed unthinkable just a few years ago.
Procter & Gamble is tackling complexity. In 2016, for example, it sold most of its cosmetics business to Coty. In 2018, it simplified its organizational structure by creating six different divisions, each with its own CEO with full authority to run that division. Since 2014, the company has been getting rid of unnecessary and obscure brands. All of these steps were designed to eliminate the bloat that so often occurs after several years of successful but scrutinized expansion.
None of these measures, however, changes the fact that Procter & Gamble, as a longtime leader in most of its product categories, probably has the least room for growth. Moreover, it faces its toughest challenge - its main competitor is itself.
And the numbers back that up. Last fiscal year's $80.2 billion in revenue grew by a modest 5% over the previous year, but 4% of that growth came from price increases, not from expanding consumer outreach. Unit volume, or the total number of products sold, increased by only 2%.
This slow pace is not unusual if you set aside the unusual impact of the COVID-19 pandemic. In fiscal 2019, organic sales growth was 1%. In 2018, sales were up 3%, but after subtracting the impact of acquisitions and divestitures, unit volume - the total number of products sold - was up only 1%. This is consistent with weak unit volume growth in the previous year when organic revenue growth was stagnant.
Set the stage: It's hard for a giant to become even more gigantic. Most of the growth levers P&G can pull have already been tapped.
But it's not all bad. Thanks to stock buybacks and the greater operational efficiency that comes with growing size, Procter & Gamble's bottom line is certainly capable of outpacing top-line growth. Last fiscal year, the company repurchased $10 billion worth of stock (more than 10% of revenue for the year), essentially repeating its historical pace of share repurchases. That's why the stock price is also certainly more than capable of making more progress than the company's sales.
But in terms of actual growth, beyond the growth in earnings per share caused by the stock buybacks - including growth in operating profits - Procter simply doesn't offer much else. It can't - it's just too big.
Well, that doesn't make the stock unrewarding. Investors who are looking for consistent results, solid dividends, and reliable dividend growth will have a good time with P&G stock.
That said, if you're looking for a key name for significant capital gains, there are too many other better prospects to rely on this stock. Procter & Gamble has gotten so big that there isn't much room left for real earnings growth, and the buybacks that have provided the bulk of the stock's gains don't guarantee perpetual growth.
As long as the price is above 135.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 137.47
- Take Profit 1: 141.00
- Take Profit 2: 146.00
Alternative scenario:
If the 135.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 135.00
- Take Profit 1: 132.00
- Take Profit 2: 129.00
