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Basic Needs Portfolio Selection: Procter & Gamble

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Nine weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life's necessities. It's my contention that basic needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the "Basic Needs Portfolio," will be pitted against the S&P 500 over a period of three years with the expectation of outperformance for all 10 stocks. I'll be rolling out a new selection to this portfolio every week until I've listed all 10.

You can review my previous eight selections here:

Today, I plan to introduce the ninth of 10 selections to the Basic Needs Portfolio: Procter & Gamble (NYSE: PG  )

How it fits with our theme
Since I'm developing an all-encompassing basic needs portfolio, you probably knew it was just a matter of time before I introduced the consumer-goods stock of all consumer-goods stocks -- namely Procter & Gamble.

Source: Au Kirk, Flickr.

The reason behind the selection is very simple -- P&G's products are often near-necessity goods and, as such, possess inelastic pricing and near-inelastic demand. Without sounding like a textbook, this just means that whether the economy is booming or in a recession, consumers aren't very likely to change many of their buying habits. You need toothpaste regardless of how the economy is doing, and consumer-goods companies know that, which gives them little incentive to ever lower their price on toothpaste products. The same goes for a myriad of P&G's products, which range from detergents to personal-care and beauty products. Selling a wide variety of products and possessing strong pricing power is the perfect formula for inclusion into the Basic Needs Portfolio.

The risk
Unfortunately, no investment is a sure thing, and even a well-diversified consumer-products company like P&G comes with its own unique set of risks.

First and foremost, while recessions don't necessitate that P&G lower its pricing on its consumer goods, since we know demand will stay relatively the same, that doesn't stop cash-strapped consumers who are taking home less per paycheck from trading down to non-name-brand products to save money. This was actually the culprit for weaker earnings in recent quarters for both P&G and Church & Dwight (NYSE: CHD  ) , which were basically forced into a pricing war in the detergent aisle to attract consumers at the detriment of their gross margin.

Being a global company means having exposure to foreign currencies. Although most investors will look past minor fluctuations in underlying currencies, big changes in overseas currency can have a whopping positive or negative effect on profits. For Kimberly-Clark (NYSE: KMB  ) , the company behind Kleenex tissues and Huggies diapers, it was forced to take a $36 million charge related solely to rapid devaluation of the Venezuelan bolivar in February when it reported its first-quarter results. Many global consumer-goods companies are facing similar currency translation pressures.

The final risk would be beefing up advertising only to see it have little to no effect on improving sales and brand-imaging. Former P&G CEO Robert McDonald, who served P&G as CEO for four years, led the costliest advertising budget in the world yet still failed to deliver big market-share gains in detergents and other key areas throughout much of his tenure. His predecessor, A.G. Lafley, has since come out of retirement to succeed McDonald, but skeptics remain as to whether P&G is back on the right track.

Why Procter & Gamble?
The first thing that attracts me to P&G is its ability to streamline its productivity and reduce costs. In February, P&G hit its goal of shedding 5,700 global jobs five months ahead of schedule and plans to reduce 2% to 4% of its nonmanufacturing jobs annually through 2016. That may sound like a company that's in trouble, but it actually points to a consumer-products maker that's getting more efficient in its production through investments in newer technologies, and is boosting margins through cost-cutting measures.

It also signals a company that understands where its core products lie. Last year, P&G sold its Pringles snack brand to Kellogg (NYSE: K  ) for $2.7 billion, freeing up precious capital for P&G to advertising its core brands and research new products, while giving Kellogg a way to expand its product lineup beyond just the breakfast aisle

Another selling point of P&G is its name-brand product line. There are few companies where you'll find such recognizable and iconic American brands as you will with P&G. Let me give you a sample of what you get when you buy into P&G: Tide, Crest, Pampers, Gillette, Duracell, Febreze, Pantene, Oral-B, Head & Shoulders, Charmin, and Downy -- just to name a few. Chances are very good you'll find at least a handful of these names in most American households. Best of all, P&G is always researching to improve its product line, with its third-quarter results demonstrating strong sales for its new Tide Pods and reformulated Pantene shampoos.

And of course, how could any discussion of P&G be complete without discussing its consistent dividend growth? P&G has paid a dividend now for 123 straight years and holds the fifth-longest active streak for annual dividend increases among publicly traded companies at 56 years!

*Assumes quarterly payout of $0.6015 for the remainder of 2013 and 2014. 

Furthermore, it recently boosted its share buyback target up to $6 billion, which will help reduce shares outstanding and make the company appear cheaper on a P/E basis. Its current yield of 3% is close to 50% higher than the S&P 500's average yield and easily tops the yield on a U.S. 10-year Treasury note.

With A.G. Lafley back at the helm, many, including me, believe that P&G will remain on track to deliver steady growth in U.S. and overseas markets. With brand power like this, I'm not sure how it could go wrong.

Stay tuned next week, when I'll unveil the 10th and final selection in the Basic Needs Portfolio.

As P&G's hefty advertising budget has demonstrated, the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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Related Tickers

9/29/2016 4:00 PM
PG $88.23 Down -1.23 -1.37%
Procter and Gamble CAPS Rating: ****
CHD $47.56 Down -0.77 -1.59%
Church and Dwight CAPS Rating: ***
K $77.26 Down -0.56 -0.72%
Kellogg's CAPS Rating: ****
KMB $125.22 Down -1.26 -1.00%
Kimberly-Clark CAPS Rating: ****