Procter & Gamble Has the Potential for Higher Operating Efficiencies

Procter & Gamble will enhance shareholder value with its ongoing cost savings. Unilever and Colgate-Palmolive also use cost-saving initiatives to improve their overall profitability.

Jan 30, 2014 at 3:27PM

The market has shown its optimism for Procter & Gamble (NYSE:PG), driving its shares from more than $78.20 per share to nearly $79.20 per share within only days. The recent increase in the company's share price was mainly due to decent second-quarter earnings growth. After the announcement of its second-quarter results, is Procter & Gamble a good opportunity for investors compared to Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL)?

Growing second-quarter results
In the second quarter, Procter & Gamble managed to deliver around $22.3 billion in net sales, with 3% organic sales growth. Diluted earnings per share reached $1.18, and its core EPS decreased by 1% to $1.21, which was mainly due to a negative currency impact. Excluding the currency impact, Procter & Gamble's core EPS rose by as much as 8%. Chairman and CEO A.G. Lafley commented that the company was on track to reach its objectives of 3%-4% organic sales growth and 5%-7% core EPS growth for full fiscal 2014.

During the quarter, Procter & Gamble returned $1.7 billion to shareholders in dividends. Moreover, it also returned $1.5 billion in stock buybacks, driving the year-to-date repurchase value to $4 billion. Unilever and Colgate-Palmolive also consistently returned cash to shareholders. While Unilever does not execute share buybacks, it offers the highest dividend yield at 3.6%, with the payout ratio of 60%. Colgate-Palmolive has the lowest dividend yield for shareholders, at only 2.1%, with a payout ratio of 51%.

Cost savings will also be the key theme for this year
What makes investors excited is the increased cost-savings target this year. Previously, Procter & Gamble set the target run rate of $1.2 billion, but now it forecasts more than $1.6 billion of cost of goods sold savings within this fiscal year, including material costs, logistics, and other manufacturing expenses. Moreover, manufacturing productivity is estimated to improve by 6% this year. The company also kept improving marketing-productivity effectiveness and enhancing non-advertising marketing efficiencies.

In terms of advertising and promotion (A&P) expenses, Unilever is also a big spender. Last year, the company spent $9.1 billion on A&P, including $2.4 billion in agency and production costs. It has increased marketing efficiencies by reducing the non-working media percentage out of the total A&P from 32% in 2012 to 24% in 2013. It will keep trimming this non-working media to only 20% of the total A&P.

Colgate-Palmolive also set out to cut its workforce by 6%, or 2,300 jobs, around the world and improve global supply capabilities in order to enhance overall profitability. With its global growth and efficiency program, Colgate-Palmolive expects to save around $365 million to $435 million annually by the fourth year.

Looking forward, Procter & Gamble expects to grow its core EPS by 5%-7%. The company will offset the negative currency exchange and slowdown in market growth via productivity advances, which will come in the fourth quarter of this year. With an estimated 90% in free cash flow productivity this year, it would spend around $5 billion-$7 billion to buy back its shares in the market, effectively giving its shareholders a buyback yield of 2.3%-3.2%.

My Foolish take
Procter & Gamble will definitely keep delivering good growth and improving profitability in the future, especially with its ongoing, enhanced operating efficiencies and cost savings. Moreover, income investors could feel safe with its consistently increasing dividend, with a yield at 3.1%, and a buyback yield of more than 2.3% within this year.

Following in the footsteps of the most successful investor of all time
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

  

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers