Everyone likes a surprise when it's good news. The problem is, the stock market has been delivering surprises all too regularly recently, and most of them have been unfavorable. Whether it's financial companies like Merrill Lynch or mortgage companies like Countrywide, the hits just keep on coming. As exciting as uncertainty can be sometimes, investors can find comfort in solid, predictable results like those from Procter & Gamble's (NYSE: PG ) second quarter.
You can actually just about take P&G's six-month financial statements, divide by two, do a little rounding, and you'll have second-quarter results. Consider these numbers for the second quarter and six months; respectively: total sales up 9% and 8%, gross margin up 7% and 7%, operating income up 8% and 9%, and diluted EPS growth of 17% and 17%.
Even the fact that second-quarter EPS beat consensus Street estimates by one penny isn't much of a surprise. Over the past several quarters, Procter & Gamble has on average beat those consensus estimates by -- you guessed it -- a penny each quarter. It doesn't get much more consistent than that.
The company did provide a few interesting tidbits for investors to chew on. Procter & Gamble announced plans to separate its coffee business into an independent company named The Folgers Coffee Company. The Folgers brand has been a part of P&G for 45 years, and represents about 8% of both sales and operating income.
The move is intended to create value for shareholders by allowing the company to focus on faster-growing businesses. The separation will most likely take the form of a split-off, where shareholders are given the option of exchanging P&G shares for shares in the new company. Given recent slow sales growth for the Folgers brand, I wouldn't jump at the exchange offer.
The deal, expected to be finalized from April to June, will create a significant (no estimate given) one-time earnings gain, but on an annual basis will dilute earnings per share by 3% to 5%. These effects aren't expected to be felt until the 2009 fiscal year.
One last item that caught my eye was the $3.5 billion in free cash flow for the quarter. This represents 107% of net income and compares with just $1.8 billion from last year, for a 96% increase.
The benefit comes from better management of working capital. How many other companies do you know that can generate that much extra cash just by paying a bit more attention to working capital?
Procter & Gamble was only modestly affected by increases in commodity costs that have caused more significant earnings disruption at companies like Kraft Foods (NYSE: KFT ) , Kellogg (NYSE: K ) , and Kimberly-Clark (NYSE: KMB ) . This also is not a surprise, because recently P&G has done a solid job of holding these effects in check and offsetting them with expense controls.
Procter & Gamble is rarely a cheap stock, and at just under 21 times trailing-12-month earnings, I don't see it as a screaming buy now, either. But for Foolish investors who like solid, predictable returns, a tasty 2.1% dividend, and who place a value on not losing their shirt, it's a proven winner.
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