Source: PaxForex Premium Analytics Portal, Fundamental Insight
As you know, Procter & Gamble stock is currently one of the worst performers in the S&P 500 this year. The stock briefly dropped more than 10% in early March and is still down compared to the same period last year. The dynamics on a larger scale look even worse. P&G is up just 6% over the past year, compared to a 35% gain in the broader market.
This performance gap doesn't reflect the dominant operating performance of the consumer goods giant, nor its ability to provide investors with cash over the next few years. So let's look at some of the main reasons why you can and should buy P&G today.
All consumer staple retailers did well during the pandemic, but P&G took growth to another level. The most recent quarter saw 8% organic sales growth, another astonishingly strong performance after achieving record growth in fiscal 2020. These gains were faster than those of rival Kimberly-Clark, and they were more balanced with a healthy mix of volume and price growth.
In other words, P&G is gaining market share in a growing industry that is likely to occupy a significant share of consumers' monthly spending long after the COVID-19 threat is gone. "There will probably continue to be an increased focus on ... time spent at home," company executives said in a recent conference call. "We will serve what is likely to be a permanently altered focus on cleaning, health, and hygiene."
Also, it should be noted that the short-term outlook for the industry is weak, which is not surprising after a year of unprecedented sales growth. Kimberly-Clark warned investors in late January that growth would slow to a minimum in 2021, and profit margins could fall compared to the surge in the pandemic.
No doubt P&G is not immune to these problems, but investors need not worry about their finances. Costs have been falling for years, and the company has some of the highest earnings and cash flow in the industry. These factors have helped convince management to raise its cash-flow plan to $18 billion this year alone. Some of that cash will come in the form of dividends, but most of it will come in the form of stock repurchase expenses.
At current stock prices, the company is bringing in 2.5 percent, which isn't much, and that doesn't mean the company is raising annual payouts at an unusually fast pace. But that's the trade-off for that level of reliability. P&G has paid a dividend of sorts for the last 130 consecutive years and has increased its payout in each of the last 57. This is not just a Dividend Aristocrat. It is one of the even rarer Dividend Kings on the market.
P&G is likely to announce a significant increase in its dividend in a few weeks. Management usually announces annual dividend increases just before its third-quarter financial results, which are due out April 20. But there could be an unusually large bounce on the wings.
This tenacity is one of the benefits of being a true predator in its industry. Procter & Gamble brands such as Crest toothpaste, Tide laundry detergent, and Bounty paper towels are consistently the best-selling products in their categories, and while the company's annual revenue does not compare to that of its closest competitor Unilever, P&G's marketing budget is significantly larger than that of all its competitors. In fact, Ad Age estimates that, with a marketing budget of more than $10 billion last year, Procter & Gamble is one of the largest advertisers in the world. (And for most of the last several decades, it has been the biggest.)
Besides, the consumer products company has finally taken a vital step that will help it rank first in the sector. It's going digital. That is, it now understands how important it is to do something constructive with the data mining that some 1.5 billion consumers own. That includes selling more data online. While e-commerce sales make up only 14% of the company's total revenue, they are up 50% year over year during the first half of this fiscal year. This growth rate speaks volumes about P&G's new and improved products.
After all, revenues and cash flow have grown over the past year. CEO David Taylor and his team raised growth and earnings guidance last quarter as well. Yes, the expected volatility around demand may persuade executives to avoid bold growth projections for fiscal 2022. But P&G is on par with the cash that could fund a more generous dividend increase than last year's 4% increase.
Even if P&G goes the cautious route of its new payout commitment, investors have every reason to expect increased operating and financial benefits. The company showed strong growth before the pandemic, gained market share during the turmoil, and intends to build on those gains over the next few years.
Provided that the price is above 125.00, follow these recommendations:
- Time frame: D1
- Recommendation: long position
- Entry point: 128.00
- Take Profit 1: 132.90
- Take Profit 2: 135.00
Alternative scenario:
In case of breakdown of the level 125.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 125.00
- Take Profit 1: 121.50
- Take Profit 2: 119.50
