Procter & Gamble Company (NYSE:PG) has been one of the stalwarts of the market for decades, and a stable dividend stock for investors. But the consumer staples markets the company operates in have gotten more competitive, and haven't allowed the company to grow for more than a decade.
Buying shares of Procter & Gamble today isn't the no-brainer it once seemed to be, but should you be avoiding shares altogether?
The shrinking consumer giant
Over the last decade, Procter & Gamble has actually shrunk as a company. It's sold off 43 beauty brands that accounted for over $10 billion of revenue, and has adjusted its portfolio to focus on core markets where it has a competitive advantage, like cleaning and personal care. You can see below that revenue has dropped as a result of these changes, but net income hasn't been as affected as you might think.
What we would hope to see from changes in the portfolio is a higher growth rate and expanding margins. But that's not what we see from Procter & Gamble today.
Fiscal 2018 results are telling
Last week Procter & Gamble released fiscal fourth quarter 2018 results, and the year's trends weren't great. Sales were up 3% to $66.8 billion, but organic sales growth was just 1% and volume growth alone was 2%. That means that selling prices declined a percentage point during the year, indicating very little pricing power. Core earnings per share were up 8% to $4.22 per share, but that was driven in large part by share buybacks reducing shares outstanding, not net income growth.
In fiscal 2019 management expects organic growth to pick up 2% to 3%, and core earnings per share to be $4.45, once again driven higher primarily by buybacks reducing the share count.
There's no recovery coming
It's hard to imagine Procter & Gamble being able to return to even mid-single-digit growth given its product categories. Soap, detergent, paper towels, and razors are now commonplace the world over, leaving very few growth markets to enter. And given the company's size, it's an easy target for start-ups, like Dollar Shave Club, Harry's razors, and even Quip toothbrushes.
Procter & Gamble could acquire some of these start-ups to maintain market share, but they would be expensive acquisitions and wouldn't drive the kind of organic growth that would make the stock a long-term winner.
The price is wrong for Procter & Gamble
Given the weakening trends in Procter & Gamble's main markets, the stock would have to be an extreme value for me to be interested. But it isn't, trading at 19.6 times trailing core earnings and offering just a 3.5% dividend yield.
Procter & Gamble may be a mainstay in the consumer care market, but it isn't a stock worth paying a premium price for given the fact that it's been shrinking for most of the past decade. This isn't a stock I would short given that it is cash flow positive, but it's not on my buy list today.