Procter & Gamble - Part 1

What is this consumer defensive behemoth?

Tiago Dias

Nov 06, 2021

The Procter & Gamble Company is another one of my investments, and at a PE of 25 it’s a pricey company to own.

Let’s talk about it.

What is Procter & Gamble?

As per their latest annual report, Procter & Gamble is:

The Procter & Gamble Company (the Company) is focused on providing branded products of superior quality and value to improve the lives of the world's consumers, now and for generations to come. The Company was incorporated in Ohio in 1905, having first been established as a New Jersey corporation in 1890, and was built from a business founded in Cincinnati in 1837 by William Procter and James Gamble. Today, our products are sold in more than 180 countries and territories.

In short, Procter & Gamble is an American multinational consumer goods corporation that specializes in a wide range of personal health, personal care and hygiene products.

Their products and brands are widespread and familiar to most of us, brands like Gillette, Tide, Oral B, etc… are ones that I and many other people regularly use.

This means that their business is familiar and easy to understand, after all “They make the tooth paste I use” is something that even a 5 year old child would be able to understand.

It also means that you can “keep up to date” on the company just by going about your daily life, after all, if you use their toothpaste, or their razors, and the quality starts dropping, that can be a red flag telling you to look into the company a bit better.

How is the company Organized

Procter & Gamble has 5 business segments which are subdivided into a total of 10 categories:

Health Care
- Personal Health Care
- Oral Care
Fabric and Home Care
- Fabric Care
- Home Care
Beauty
- Skin & Personal Care
- Hair care
Grooming
- Grooming
Baby, Feminine And Family Care
- Baby Care
- Feminine Care
- Family Care

Each of these business segments has their own Chief Executive Officers who in turn report to the CEO of Procter & Gamble.

In terms of revenue and sales, Fabric & Home Care is the leader, holding roughly 34% of the firms revenue, followed by Baby, Feminine & Family Care:

While revenue and earnings are not one and the same, Procter & Gambles business have very similar profit margins, and so each segment contributes roughly the same distribution in earnings as they do for revenue:

Consumer goods are a boring business to be in, and one where branding and economies of scale are key in order to eke out some profits.

Fortunately Procter & Gamble is a very well established company, that has a lot of recognizable brands and economies of scale that allow it to be one of the few companies able to do well in this market.

The products they sell are also generally seen as “essential”, and this has allowed them to survive troubling economic climates over its long history.

While its true that inflation may have to cause them to raise their prices, the inherent stickiness of consumers on the goods they sell, and the economies of scale that they enjoy will put them in a better position than many of their smaller less well established competitors.

It’s this stability in their business model that has let them pay a regular dividend through thick and thin.

The Dividend

Procter & Gamble has been paying a dividend for 131 consecutive years since its incorporation in 1890, and has increased its dividend for 65 consecutive years since 1956.

This makes Procter & Gamble not just a Dividend Aristocrat, but a Dividend King.

Over the past 10 years, the dividend has increased at an annual compound average rate of 5%.

While future dividends are issued at the discretion of the company’s board of directors, it is clear that the board, and the employees of Procter & Gamble are focused on returning capital to Shareholders, and will likely continue to do so as long as business conditions allow it.

With a payout ratio of around 63%, a stable business and historical earnings growth in line with dividend growth, I would classify the dividend as safe for the foreseeable future.

Income Statement and Balance Sheet

Let’s take a look at their income statement and their Balance Sheet:

The high pre-tax margins are very good, I like to own companies with pre-tax margins above 20%, and Procter & Gambles 23% pre-tax margins are music to my ears.

The fact that they are doing this with very low interest expenses shows that the company has fairly low leverage.

This is confirmed in the balance sheet, where although the current liabilities are higher than the current assets, their long term and short term debt is lower than their shareholders equity.

I don’t expect Procter & Gamble to have trouble in the next year or so, even if they have to refinance in order to pay off the debt that will come due in the next 12 months.

The most concerning part is the high amount of Goodwill and other intangibles in the balance sheet, but given the impact that branding has in helping Procter & Gamble maintain its profit margins, this is to be expected.

If the company had low margins, I would be more concerned.

Strengths and Weaknesses

Every company has strengths, and weaknesses, and it’s important to be aware of them before we consider investing in it:

Strengths:

High margins
Stable and simple business model
Commitment to shareholder value
Diversified business

Weaknesses:

Mature industry results in low opportunities for growth
Competitive industry
Vulnerable to inflation

Summary

Overall Procter & gamble is the type of company i like to own.

It’s simple to understand, stable, and clearly prioritizes shareholder returns while maintaining the health of the business.

I don’t have to go to sleep at night worrying if Procter & Gamble is going to go belly up, nor do I have to worry about some new entrant coming in and making their business obsolete.

Their products are useful, and there is little regulatory oversight that is directed straight at them.

But of course, when it comes to investing we should do so with our head, not our stomach.

And to do that, we need to know what price we should be willing to pay for this Dividend King, so we will be doing just that next week.

Do you use Procter & Gamble Products? Let me know if you like them or not down below!