Procter & Gamble Co. owns some of the world's best-known brands, has a rock-solid balance sheet, and its dividend has increased for 54 consecutive years.
Yet shares of the world's biggest consumer products marketer are trading at the same price they fetched back in 2006, making this an ideal time to invest in one of the bluest of blue-chip stocks, analysts say.
"We expect P&G to provide investors with a very good risk-adjusted, long-term return," Odlum Brown analyst Stephen Boland said in a note. "It has a very profitable business with good long-term growth prospects and a very attractive valuation multiple."
The maker of Tide, Crest, Pampers, Gillette, Duracell and dozens of other familiar brands is coming off a fourth-quarter earnings report in August that fell short of expectations, sending its stock into the laundry hamper.
The sluggish global economy, a promotional sales environment and growing competition from private-label brands are all weighing on P&G's results. But one of the main reasons P&G's earnings missed estimates is actually a positive sign: The company is investing aggressively for the future.
In fiscal 2010, P&G's advertising spending jumped 13 per cent, to $8.6-billion (U.S.), as the company supported existing brands and rolled out new products such as Gillette Fusion ProGlide razors and Pampers Dry Max diapers. As a percentage of sales, P&G's ad spending was the highest in decades, Mr. Boland said.
While this hurt P&G's profits in the short term, "we think this step up in innovation and advertising will help build brand equity and contribute toward business momentum," he said.
What's more, P&G's sales volumes are growing at double-digit rates in emerging markets such as China and India, where it has a huge opportunity. Over all, sales rose 5 per cent in the quarter, and that number could soon move higher.
"With marketing muscle to support growth, plus a robust innovation pipeline, we expect sales trends to get even stronger once the global economy begins to strengthen a bit," Edward Jones analyst Jack Russo said in a recent note.
P&G has even started using its iconic brands to sell services, such as Tide Dry Cleaners and Mr. Clean Car Wash franchises it is rolling out in the U.S. market.
All of this should translate into growing sales, profits and free cash flow to support more share buybacks and dividend hikes. Mr. Russo projects that P&G will hike its dividend by about 7 per cent annually over the next five years.
Despite the encouraging outlook, P&G's stock is trading as if the company's best days are behind it. The price-to-earnings ratio has tumbled to about 15 times estimated current-year earnings, down from more than 20 a few years ago.
The dividend yield, meanwhile, has climbed to 3.2 per cent – a full point higher than it was two years ago.
"The valuation is very compelling," Mr. Boland said. He's not alone in that opinion. Of the 26 analysts who follow P&G and whose ratings are tracked by Bloomberg, 16 call it a "buy" and 10 rate it a "hold." Not one has it as a "sell."
Billion-dollar brands
Headquarters: Cincinnati, Ohio
Operations in: About 80 countries
Employees: Approximately 127,000
Sales: $78.9-billion (U.S.) in 2010
Established: 1837
Brands:
- 22 brands generating more than $1-billion in annual sales
- 20 brands generating about $500-million or more in annual sales
Source: Procter & Gamble
John Heinzl