Procter & Gamble Has the Potential for Higher Operating Efficiencies

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.

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