Procter & Gamble's (NYSE:PG) stock has risen roughly 10% over the past 12 months, outperforming the S&P 500's 0.8% dip over the same time period. As the COVID-19 pandemic spread, consumers bought more of P&G's billion-dollar brands -- including Bounty, Charmin, Crest, Head & Shoulders, Gillette, Pampers, Pringles, and Tide -- as they prepared for prolonged lockdowns and social distancing measures.

That consistent demand, along with a 64-year streak of annual dividend hikes, made P&G a good defensive play in a volatile market. The stock also generated a total return of 70% over the past five years, making it a sound long-term investment. But can it maintain that momentum over the next five years?

A shopping cart in a supermarket aisle.

Image source: Getty Images.

Understanding P&G's business

P&G splits its business into five segments: beauty (19% of its sales last year), grooming (9%), healthcare (12%), fabric & home care (33%), and baby, feminine, and family care products (26%). It significantly downsized its beauty unit upon selling its specialty beauty business to Coty (NYSE:COTY) in late 2016.

P&G traditionally struggles with three main challenges: competition from generic and private-label brands, weaker brands offsetting stronger ones, and currency headwinds. Nonetheless, P&G's organic sales and core EPS -- which exclude acquisitions, divestments, and currency shifts -- remained broadly stable over the past five years. Consistent buybacks also buoyed its EPS growth and tightened up its valuations:

Growth (YOY)

2015

2016

2017

2018

2019

Organic Sales

1%

1%

2%

1%

5%

Currency-Neutral Core EPS

11%

(8%)

11%

6%

15%

Source: P&G annual reports.

P&G's grooming business, which faces intense competition from rivals like Unilever's (NYSE:UL) Dollar Shave Club, was a weak link throughout the first three quarters of fiscal 2020. The beauty business also struggled, especially in its stronger Asian markets, as the pandemic disrupted the travel and retail sectors.

However, P&G still expects its organic sales to grow 4%-5% for the full year, which ends on June 29, and for its core EPS to rise 8%-11%. Therefore, the strength of its three other businesses -- which include essential consumer staples like toilet paper, paper towels, diapers, and cleaning products -- would likely offset the weakness of its grooming and beauty businesses. P&G also recently raised its dividend by 6%.

P&G's clear guidance and dividend hike indicated that its business was still humming along as other companies withdrew their forecasts and reduced or suspended their dividends. P&G's forward P/E of 23 looks a bit high relative to its growth, but the strength of its core brands, its strong cash flows, and its clear guidance arguably justify that premium.

What about the next five years?

P&G doesn't have much room to grow since its products are already sold in over 180 countries, but it will likely keep buying hot brands and divesting weaker ones. It will expand its stronger brands, like SK-II in Asia, and continue to cut costs as it passes the midpoint of its second five-year $10 billion productivity program.

An SK-II ad.

Image source: P&G.

Over the past 12 months, P&G spent 68% and 22% of its free cash flow on buybacks and dividends, respectively. That trend should continue over the next five years. P&G will likely continue to generate low-single-digit organic sales growth over the next few years as cost-cutting measures and buybacks boost its core EPS.

Investors should always take Wall Street's long-term forecasts with a grain of salt, but analysts currently expect P&G to grow its annual earnings at an average rate of 7.5% over the next five years. That forecast gives P&G a 5-year PEG ratio of 3.0, which isn't cheap -- a PEG ratio under 1.0 is considered undervalued.

However, that ratio remains in-line with those of its industry peers: Unilever has a slightly lower ratio of 2.2, while Kimberly Clark (NYSE:KMB) -- a more direct beneficiary of the rush on toilet paper, tissues, and other paper-based products -- has a much higher ratio of 4.9.

The market's interest in P&G, Unilever, and Kimberly Clark might cool off after the COVID-19 crisis ends, but they could still be popular defensive stocks if the pandemic sparks a global recession. In other words, I fully expect P&G and its peers to gradually climb higher -- and possibly outperform the S&P 500 again -- over the next five years.