Check out the latest Procter & Gamble earnings call transcript.
Procter & Gamble (PG +0.20%) shareholders finally found cause for celebration in 2018 as the stock outperformed the broader market for the first time in years. Sure, its flat result didn't make the consumer products titan a home-run investment. But P&G fared better than the S&P 500, which saw a 6% decline, and it ended the year on an optimistic note -- up 18% in 2018's final six months. Those returns look even better when you factor in dividend reinvestment.
But what's ahead for P&G stock, which sat out almost all of the market rally of the past decade? Let's take a look.
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1. Profitability will rise
P&G controls a dominant share in many premium global franchises, including Tide detergent and Pampers diapers. That unique positioning, combined with its world-class supply chain, makes it one of the most financially efficient businesses in the industry -- and the wider market.
The company is set to extend that lead in the coming year, too. P&G is rolling out price increases across its portfolio while continuing to slash costs in key areas like manufacturing, distribution, and marketing. Put these trends together and there's a good chance management can improve on the 21% operating margin to add more distance between P&G and peers like Kimberly-Clark.
2. Accelerating growth
The company faces a key test in 2019 in aiming to accelerate sales growth in the face of those price increases. But the outlook is decidedly positive on that score. After all, P&G closed out calendar 2018 by posting its fastest organic revenue increase in years. Sales jumped 4% to mark a healthy improvement over the prior quarter's 1% uptick.
CEO David Taylor and his team said in late October that they see room for additional gains ahead. P&G held or gained market share in about 33% of its competitive segments last quarter, up from about one-quarter in the prior year. With sales volumes rising, too, that situation points to better days ahead. In fact, P&G is predicting organic growth will land at between 2% and 3% this fiscal year to double or triple the prior year's output. And unlike in each of the last two years, which included growth downgrades, the company should at least meet its target this time around.
3. A bigger dividend
P&G just shifted its spending strategy by acquiring major new healthcare franchises from Germany-based Merck. That move means cash will be flowing out of the business in 2019 rather than coming in from the type of brand divestments the company has made over the last few years.
There's still good reason for investors to expect higher cash returns, though. P&G is generating tons of free cash flow and converting nearly all of that haul into earnings. As a result, the company plans to deliver about $7 billion to investors in the year through dividends and stock repurchases. There's no doubt the company will raise its annual dividend payout in April, just as it has in each of the last 62 years. With earnings on pace to rise by about 8% this year, meanwhile, the size of that increase could easily beat 2018's 4% hike.
Will investors approve?
The big question is whether shareholders will approve of P&G's results for a second straight year, or instead show their disappointment as they did in forcing a management shake-up the previous year. The one metric likely to determine the outcome will be market share. If P&G can continue outgrowing the wider industry, especially as it increases prices and becomes more profitable, shareholders should look back on 2019 as a good one for the business and the stock.
