The consumer goods space that Procter & Gamble (NYSE:PG) operates in has been challenging for a while now, but apparently, the company has gotten its groove back. Its first-quarter report featured an earnings beat, and it was the third straight period of impressive growth. But "impressive" is relative. Sales volumes are up in the low-single-digit percentages, as are net sales. So the 40% share price increase over the past 12 months might be viewed as overdone.
In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Managment's Bill Barker discuss P&G's successful strategy of paring down its brands, its pricing power and dividend history, the competition in the razor game, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on April 23, 2019.
Chris Hill: On a day when Hasbro is up double digits and Twitter is up double digits, the most surprising thing to me is Procter & Gamble. Procter & Gamble's third-quarter profits and revenue came in higher than expected. This is the third quarter in a row they've put up, I would argue, some pretty impressive growth. The stock is actually down a couple of percentage points. It's had this staggering run over the past year. When we say staggering, what I mean by that is, 40%. For a company of Procter & Gamble's size and history, 40% growth in a single year is astonishing to me.
Bill Barker: It is astonishing. You're not going to find the explanation of that in something like the quarterly numbers today, which while good, better than expectations, volume was up 3% for the quarter across all products. They were hurt by foreign exchange a little bit. Net sales up 1%. Organic volume up 2%. These are low-single-digit numbers in terms of your growth. And yet, the stock is up 46% year over year. That's really a lot of multiple expansion. I think that they have completed this reduction of the number of brands they have down to the core 65 that they have today, having eliminated many more than that. It seems like the execution of that reduction has worked out well.
But if you're looking for reasons why the stock is not doing the same thing as the other two companies that we've mentioned today, it's closer to a stagnant kind of sales environment.
Hill: Two things. One, we started doing this podcast in early 2011. At that time, Procter & Gamble had somewhere in the neighborhood of 115 to 120 brands under its umbrella. The methodical reduction in the number of brands in their portfolio has worked out well for them.
Two, this is one of the most surprising things to me about Procter & Gamble, this is a company that appears to be exercising some pricing power in terms of their detergent brands, their laundry brands, that sort of thing. And, oh, by the way, they increased their dividend. This is the 63rd year in a row that Procter & Gamble has increased their dividend. To the extent that you're looking for a Dividend King, not just a Dividend Aristocrat, you might want to take a look at Procter & Gamble.
Barker: Yeah. Everything went pretty well out of their five different sales divisions, other than grooming. I think that's a function of the Gillette brand.
Hill: I was going to say, they have Gillette.
Barker: Nobody uses Gillette anymore, apparently.
Hill: Well, it's not that nobody uses Gillette anymore.
Barker: It's all Harry's, isn't it?
Hill: Yeah. I mean, all kidding aside, Harry's is one of our sponsors. We love Harry's! I'm a happy customer of Harry's and have been for years. But the fact of the matter is, Gillette basically operated a monopoly -- I guess it was Gillette and Schick. There were basically two razor brands, and they had the universe to themselves. Then upstarts like Harry's come along, Dollar Shave Club. And it's like, "Oh, I guess this cash cow that we've been riding for so many years, we're not going to be able to do this in quite the same way."
Barker: Yeah. Part of that was, once you've got a business strategy, the attractiveness of which is literally encapsulated by a phrase that you then try to apply everywhere else -- the razor-and-blade strategy, right?
Hill: [laughs] Right.
Barker: That was repeated enough times over enough decades that others looked at and said, "Huh. What if I literally applied the razor-and-blade strategy, since that's making so much money off of these two brands? Maybe I could make some money myself doing that." And that has turned out to be the case.
Hill: There was a point in time when Hewlett-Packard was making a nice buck off of their razor-and-blade strategy, which was printers. "We're going to sell printers basically at cost, then we're going to jack up the cost of the printer ink." Again, for a good stretch of time, that worked out well for Hewlett-Packard.