Is P&G Stock a Buy After the Dividend Increase?

A titan in the consumer defensive sector, Procter & Gamble PG raised its quarterly dividend by 3% last month, to $0.9407 per share from $0.9133. P&G stock isn’t a bargain today, but if it were to retreat on macro or global concerns, we’d look to buy. Here’s why.

Now that Procter & Gamble has posted its 19th consecutive quarter of at least mid-single-digit organic revenue growth, concerns about lackluster sales growth are a distant memory. While the company has been a beneficiary of the pandemic thanks to its cleaning and disinfecting product offerings, we attribute its accelerating top line to the strategic course it embarked on about nine years ago: rightsizing its category and geographic reach by shedding around 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs. As a part of this playbook, P&G adopted a more holistic approach to brand investing—encompassing product performance, packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers. We think this should support the company’s wide economic moat for the long term.

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate: $129
• Star Rating: 2 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Economic Moat Rating

We assign Procter & Gamble a wide economic moat rating resulting from its intangible assets and cost edge. Thanks to its position as a leading household and personal-care manufacturer, we think P&G is a valued partner for retailers, supporting its brand intangible asset moat source. We believe P&G maintains the resources to bring new products to market and tout that fare in front of consumers to drive customer traffic into stores and onto e-commerce platforms, which we believe enhances the stickiness of its retailer relationships. In our view, trusted manufacturers like P&G, which operate with a product set that spans the grocery store, are critical to retailers that are reluctant to risk costly out-of-stocks with unproven suppliers. Despite the bargaining power of a consolidating base of retailers, leading brands—like those in P&G’s portfolio—still drive store traffic. Bolstering its competitive position are the size and scale P&G has amassed over many years, which enable the company to realize a lower unit cost than its smaller peers, resulting in a cost advantage.

Read more about Procter & Gamble’s moat rating.

Fair Value Estimate for Procter & Gamble Stock

Our fair value estimate of $129 per share implies a fiscal 2024 price/adjusted earnings of 21 times and an enterprise value/adjusted EBITDA of 16 times. We expect about 4% annual sales growth and a nearly 25% operating margin in fiscal 2032, up from an average of 22.4% over the past five years. P&G isn’t immune from recent cost pressures—which we now expect to be a $3.5 billion headwind in fiscal 2023, on top of $3.2 billion in fiscal 2022—but we think it remains focused on unearthing efficiencies in its underlying business and raising prices to offset the challenges it faces. We’re encouraged by the company’s intention to continue to lean into brand spending as an opportunity to showcase the value its products offer consumers, as opposed to preserving profits in an uncertain climate. In the long term, we forecast P&G will allocate about 3% of sales to research and development and 10%-11% of sales to marketing annually.

Read more about Procter & Gamble’s fair value estimate.

Risk and Uncertainty

We assign P&G a Low Morningstar Uncertainty Rating. This sector has been challenged to offset commodity, labor, and transportation cost inflation with higher prices. Any product recalls or claims of price-fixing could weigh on volume, although we don’t see these factors as likely to materially impair P&G’s brand standing or cash flows. With 50%-60% of its sales derived outside the United States, P&G is exposed to currency changes, which could constrain its reported financials. In the past, the company was challenged by executional missteps, which saw it overextend as it sought to build out its category and geographic footprint; however, we think it’s charted a new course.

Read more about Procter & Gamble’s risk and uncertainty.

P&G Bulls Say

• To the extent that retailers and consumers continue to find favor with leading branded operators, P&G’s sales trajectory may outpace our expectations.
• Additional opportunities to narrow its product mix could enable P&G to more effectively direct its brand spending to the highest-return areas.
• Although P&G has reached the end of its second $10 billion cost-reduction effort, further savings could result if efficiency is as ingrained in its culture as management suggests.

P&G Bears Say

• Disruption to travel retail (around $1 billion in annual sales for P&G) caused by lockdown measures has plagued the company’s beauty segment, which contributes nearly one fifth of sales. These challenges may spring up again if mobility restrictions are reinstated.
• Consumers in some European markets are increasingly turning to private labels amid widening price gaps, and we think constraints on consumer pocketbooks could incite a similar response on P&G’s home turf in time.
• Foreign-exchange volatility may hamper profits over time, since P&G makes and sells its fare in different geographic regions.

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