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.

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.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2817370, ~/Articles/ArticleHandler.aspx, 8/29/2015 5:43:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Global long-term value investor. CFA level 3 candidate. His US portfolio is up 43.60% in 2013, beating S&P 500's total return of 32.4%.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
CL $63.35 Up +0.26 +0.41%
Colgate-Palmolive CAPS Rating: ****
PG $71.21 Down -0.27 -0.38%
Procter & Gamble CAPS Rating: ****
UL $40.35 Down -0.26 -0.64%
Unilever CAPS Rating: ****