Procter & Gamble - Part 3

Let's have a look at the story of this consumer goods giant

Last week we valued Procter & Gamble, a Consumer Defensive company founded in 1837 and headquartered in Cincinnati, Ohio that has been paying dividends for 131 consecutive years, and has increased its dividend for 65 consecutive years.

In that valuation we came to the conclusion that I might have overpaid for the company, since it should have an average long term value of $116, while I purchased it at $125.

Today we’re going to have a look at this companies story. We will be going over the risk factors, its prospects in the near future, and what my next steps regarding it will be.

The Risk Factors

Every company has risks inherent to them and Procter & Gamble is no different.

Fortunately there is an easy way to find them out, we just need to read their annual report.

There’s plenty of risks outlined there, but I’ll outline the ones I find more important:

• Our success can be attributed to the existence and continued protection of these trademarks, patents and licenses.

• The markets in which our products are sold are highly competitive.

• Our Company is subject to a wide variety of laws and regulations across the countries in which we do business

• Our business is subject to numerous risks as a result of our having significant operations and sales in international markets, including foreign currency fluctuations, currency exchange or pricing controls and localized volatility.

• Our business results depend on our ability to manage disruptions in our global supply chain.

• Our businesses face cost fluctuations and pressures that could affect our business results.

Each of these risks are fairly self-explanatory, but they can be roughly separated into 3 categories:

1. Market impacts, namely those related to competing in a competitive market with a lot competitors

2. Diversification impacts, related to the fact that the company operates all over the world

3. Supply chain impacts, particularly those related to commodity prices and other inflation related issues

All of these can be problematic, but none of them are a “deal breaker” for me, and indeed most are wholly external to them company itself.

The Near Future Prospects

It’s clear that management has their eye on the ball, and intends to keep up with their strategy of producing a premium product focused on strong brands that focus on innovative and desired products in order to fulfill customers needs:

This is the exact strategy that they have been successfully doing for the past hundred years, and it’s one that I approve of.

Having and selling a premium product at a premium price will enable them to handle inflation while maintaining their margins going forward.

Overall I don’t expect Procter & Gamble to change their strategy and business model in the near future, because their existing one is already suitable for the market conditions in which they operate in.

The Next Steps

So what do I do next?

Clearly Procter & Gamble is a reliable company that I can continue to own in order to receive regular and growing dividends for the foreseeable future.

If my goal is purely to continue receiving dividends, then owning Procter & Gamble isn’t a bad way of going about it.

That said, Procter & Gamble is a bit overvalued at this time, since it is selling at a price of $142 per share, compared to my estimated long term value of $116.

But is it extremely so? I don’t think so.

Using the same 30% margin of safety that I use for deciding to buy companies, we can see that it would only be extremely overvalued at around $150 per share.

As a general rule, I don’t want so sell companies when they are at their fair price.

I want to sell companies when they are wildly overvalued.

At this time I don’t believe that is the case for Procter & Gamble.

Yes, I paid too much for the company, and yes, it does appear to be slightly overvalued right now. But it is not overvalued enough for me to sell them right now.

What about you? Are you bearish on Procter & Gamble?

Would you sell your stake in the company?

Let me know if the comments below!

And of course, don’t forget to subscribe!