Please ensure Javascript is enabled for purposes of website accessibility

Procter & Gamble: Buy at the High?

By Anders Bylund - Jan 22, 2020 at 8:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The consumer goods titan is reaching all-time high share prices almost every day. Is the stock still a buy even at these dizzying heights?

Consumer products veteran Procter & Gamble (PG 1.53%) 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?

Rendering of two golden statues, a bull and a bear, facing off against each other on a glassy surface.

Image source: Getty Images.

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:

PG Chart

PG data by YCharts

The $4.2 billion buyout of pharmaceuticals giant Merck's (MRK 0.83%) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$148.72 (1.53%) $2.24
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$93.08 (0.83%) $0.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.