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Procter & Gamble Co. Returns to Growth

By Joe Tenebruso – Oct 27, 2016 at 10:46AM

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The consumer-goods titan delivered organic sales growth across all of its major business divisions.

Image source: Procter & Gamble.

Procter & Gamble (PG -0.06%) reported fiscal 2017 first-quarter results on Oct. 25. The owner of brands such as Gillette razors and Crest toothpaste enjoyed a rebound in sales growth, as well as solid profit and cash flow generation.

What happened with Procter & Gamble this quarter?

Organic sales -- which exclude the impact of foreign exchange, acquisitions, and divestitures -- rose 3%. The growth was broad-based, with organic sales increasing in all five of P&G's business segments. And, importantly, P&G's sales growth was driven mostly by higher shipment volumes, rather than price increases, which signifies increasing demand for P&G's products.

Foreign currency movements did, however, weigh on Procter & Gamble's results. These currency fluctuations reduced sales by 3 percentage points, which is why P&G's reported revenue was essentially flat year over year at $16.5 billion.

Profitability also continues to improve. On a currency-neutral basis, "core" (a measure that adjusts for restructuring and other non-recurring charges) gross margin and operating profit margin increased 130 basis points and 120 basis points, respectively, mainly due to productivity cost savings. That helped constant-currency core earnings per share, which rose 12% to $1.10.

"Our first quarter results mark a good start to the fiscal year," said Chairman and CEO David Taylor in a press release. "We delivered broad-based organic sales growth improvement across product categories and markets, as well as strong cost savings."

Cash flow and capital returns

Importantly, Procter & Gamble's cash flow generation remains strong, with first-quarter operating cash flow exceeding $3 billion and free cash flow surpassing $2.3 billion. The company remains committed to passing this cash on to shareholders, as demonstrated by the $1 billion of share repurchases and $1.9 billion in dividend payments that P&G conducted during the quarter.

Looking forward

Procter & Gamble reiterated its full-year fiscal 2017 guidance, including all-in sales growth of approximately 1%. Organic sales are still expected to increase 2%, with foreign exchange and minor-brand divestitures projected to reduce sales by 1%.

Procter & Gamble also maintained its outlook for "mid-single digits" core earnings-per-share growth, compared to fiscal 2016 core EPS, of $3.67.

"Earlier this month, we completed the last major step in P&G's portfolio transformation with the Beauty Brands divestiture to Coty Inc.," added Taylor. "We are now focusing all our efforts on 10 large, structurally attractive categories where P&G holds leading positions. We're pleased with the progress we're making, but there is still more work to do to get back to the levels of balanced top- and bottom-line growth and cash generation that will consistently put P&G shareholder value creation among the best in our industry."

That top-line growth will be vital if Procter & Gamble is to deliver market-beating returns to investors going forward, as cost-cutting can only go so far. Management's commitment to funneling cost savings into increased marketing and innovation-focused investments should help in that regard, as should P&G's more streamlined brand and organizational structure. Still, sales growth will remain an uphill challenge for P&G due to tepid global growth in the packaged consumer goods industry as a whole, as well as increasing competition, particularly in the e-commerce space. As such, Procter & Gamble, with its 3% dividend yield, is likely a better choice for those seeking a relatively stable income-producing investment, rather than for those looking for growth.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble. 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.

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