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Stock Strategist

P&G's Pullback Is Investors' Potential Gain

The wide-moat company is working to boost sales as well as profitability.


We think the pullback in  Procter & Gamble’s (PG) share price has created an even more attractive entry point for long-term investors. Beyond the attractive valuation, shareholder returns stand to be enhanced by a 3.5% dividend yield. We believe returning excess cash to shareholders will remain a priority and forecast mid- to high-single-digit dividend growth over the next 10 years.

Top-line growth across the industry remains elusive. Despite the market’s seeming lack of confidence, we believe the benefits of P&G’s more focused investments should yield improvements across its product mix, bolster sales and volume growth, and subsequently strengthen the brand intangible asset source of its wide economic moat. We believe P&G is poised to increase underlying sales at a 4% clip longer term, with nearly two thirds of its annual growth from increased volume and the remainder from higher prices and improved mix. But we don’t think these top-line gains will come at all costs; rather, we think P&G is working to reignite sales while also beefing up its profitability. We expect its current $10 billion cost-saving effort will lead to 500 basis points of operating margin gains, yielding a 24% margin over the next 10 years, and fuel spending behind product innovation and marketing to combat competitive pressures.

Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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