Check out the latest Procter & Gamble earnings call transcript.
The recipe for generating massive long-term shareholder returns is simple, if not a little boring. Just invest in companies with durable competitive advantages and hold on for decades. Your gains are frequently supercharged by dividend reinvestment with stocks that regularly boost their payouts, so a seven-figure portfolio is achievable over a typical investing lifetime.
Procter & Gamble (PG -0.15%) seems to check all of those important boxes. It owns a collection of some of the most dominant consumer product franchises around, and its dividend growth streak, at over 60 years, is one of the longest on the market. But those impressive assets don't necessarily ensure market-beating investor gains, as shareholders have learned over the last few years.
A multiyear funk
P&G's operating strategy involves using its premium positioning in consumer staples niches like diapers, paper towels, and razors to outgrow the wider industry. Its global scale and world-class supply chain, meanwhile, help produce even faster profit growth. Combine these trends with rising cash returns in the form of dividends and stock buybacks, and you have the potential for modest, but persistently strong total returns that can snowball into life-changing gains for investors over decades.
That formula has broken down in recent years, though. P&G missed its growth targets in each of the last two fiscal years, even after having wrapped up a portfolio reboot that saw it remove 100 weaker brands from its operations. Sure, cost cuts and restructuring initiatives have kept earnings rising lately, and cash returns have soared. But without that fundamental market-share boost, the stock has lagged the broader market for most of the last decade.
Signs of a rebound
The good news is the tide could finally be turning back toward accelerating growth. P&G recently posted its fastest organic sales pace in years, with revenue rising 4% after accounting for foreign currency shifts and brand divestments. That result outpaced peers like Kimberly Clark (NYSE: KMB) by a wide margin. It was driven by a healthy balance of rising sales volumes and higher pricing, too, which implies plenty of room for additional gains ahead.
Still, P&G has gone through optimistic periods like this in the recent past only to disappoint investors by reducing its growth forecast because of demand struggles in franchises like Gillette razors. That's why it's critical that the company meet its fiscal 2019 prediction of sales gains that range between 2% and 3% to at least double the prior year's expansion pace. P&G's return to market darling status would have to start with management demonstrating that it has a good reading on its growth opportunities, and that those gains can come in the context of steadily rising prices.
Assuming the business can get back on track in terms of growth, P&G has all the right firepower to ensure that earnings keep climbing and that shareholders are richly rewarded for their patience. The company's 20% operating margin makes it an industry leader with respect to profitability, and it remains one of the most efficient stocks on the market at converting profits into free cash flow. That financial prowess, in turn, gives management plenty of funds it can direct toward growth initiatives and those direct shareholder cash returns.
We're not talking about head-turning gains, here, but something closer to high single-digit returns overall. Still, what investors give up in terms of exciting growth can be more than offset by P&G's steady long-term expansion, which the company might be on the cusp of recapturing over the next few quarterly reports.