Consumer products veteran Procter & Gamble (PG 1.58%) is setting fresh all-time highs nearly every week nowadays. The stock has gained 38% over the past 52 weeks, breaking a habit of trading mostly sideways from 2013 to 2018.
Does P&G have any rocket fuel left in its tanks or will this mature industry giant start behaving like a sleepy value stock again?
How healthy is P&G's business?
In October's first-quarter report, P&G showed significant year-over-year growth in four of its five product categories. Health care led the way with 20% higher net sales driven almost entirely by 17% higher unit volumes. Management pointed to strong sales of premium tooth care products and unusually active consumer interest in cough and cold medication. Beauty products posted 8% higher revenues thanks to a double-digit increase in organic sales. Here, the product mix shifted toward the pricier end of the spectrum.
These are not unique points of light but sustainable trends. Health care sales also rose by a double-digit percentage in the fourth quarter of fiscal year 2019, and organic sales have been surging all year long in the beauty division. All of these gains were achieved in the face of substantial currency exchange headwinds.
I would be surprised to see P&G's healthy sales trends breaking down when the company reports second-quarter results this Thursday -- or at any point in the foreseeable future. With market-defining brand names like Tide, Gillette, Vicks, Crest, and Old Spice, this company dominates nearly every subsector in which it chooses to compete. More than 20 of these brands generate more than $1 billion of annual sales. That's per product line, not a total across all these household names. As a reminder, P&G pulled in a cool $68.8 billion of total sales over the last year.
How healthy is the stock?
P&G has most certainly been on a roll recently. The steady climb since the summer of 2018 is nothing short of impressive:
The $4.2 billion buyout of pharmaceuticals giant Merck's (MRK 1.33%) consumer products division was announced just before that hockey-stick moment and closed soon afterward. That deal kicked off a string of rosy reports from P&G's healthcare segment, and that momentum continues today.
Investors embraced P&G's business improvements with enthusiasm, driving share prices upward faster than the underlying earnings and cash flow improvements. As a result, the stock now trades at historically high price to earnings and price to cash flow ratios.
It is tempting to wave P&G off as an overpriced turnaround stock right now, but I think that would be a mistake. You get what you pay for -- an unrivaled portfolio of consumer goods businesses organized into a smoothly humming cash machine, which in turn rewards investors with a generous dividend yield of 2.4% and a $6.7 billion annual budget for share buybacks.
So growth investors wouldn't back up the truck to Procter & Gamble in its current form but those who are stalking Wall Street in search of long-term value bets and generous dividend payers should definitely take a second look at this stock. Yes, even at these lofty stock prices -- Warren Buffett would advise you to buy great companies at fair prices rather than the other way around.