Investors looking for an exciting company to explore and perhaps buy stock in can breeze on by Procter & Gamble (PG 0.67%). The consumer staples giant simply doesn't spark a lot of excitement.
But in most regards, that's the point. Boring can be beautiful when boring means a company rarely throws its shareholders an ugly surprise. Procter & Gamble -- the name behind Tide laundry detergent, Gillette razors, and Head and Shoulders shampoo, just to name a few -- may not be setting the world on fire, so to speak, but it's got the durability and reliability most shareholders need for at least a portion of their stock portfolios. And now, it's got growth to boot.
Not your father's Procter & Gamble
Shortly after taking the helm at Procter & Gamble for a second time in 2014, then-CEO A.G. Lafley realized that the company had become so big that it had also become unwieldy. So, Lafley began to sell off what was hoped to be about half of the company's total brands (although not necessarily half the company's revenue sources). Pet food brand Iams was one of the first major names to be culled. Then, in 2016, P&G sold many of its beauty brands to Coty. Neither brand was a great fit for where the company was going, especially given the focus each brand needed to get there.
Image source: Getty Images.
Current CEO David Taylor picked up where Lafley left off. When he was named chief in 2015, he continued to shed brands that were more distracting than beneficial, even though much of the divestiture work was already under way (if not quite done). Taylor's first and biggest priority, however, was rebuilding Procter & Gamble to its previous prowess by innovating rather than imitating. In a 2016 interview with CNBC, he explained very plainly: "I believe very much that it will come down ultimately to innovation that builds categories, and if we do our job better than others, we'll get a little bit of share growth."
Taylor also pushed P&G's marketing approach into the web-centric 21st century. The company cut another $350 million from last year's advertising budget, driving that expense down by roughly $1 billion per year in a very short timeframe. Yet, smarter marketing tactics have let the company do more with less. Last year it began to employ what Taylor described as "propensity marketing" that leverages the consumer database it's been building for a while. Late last year, Chief Brand Officer Marc Pritchard explained one way the premise has been turned into action. His example was the decision to decrease the use of unfocused television advertising. Going forward, Pritchard said, Procter & Gamble would be looking to do more outright sponsorships of TV programs that attract a specific, like-minded audience and then tie in that media with certain P&G products.
Helping drive all of these changes was activist investor Nelson Peltz and his Trian Fund. Trian's involvement began in earnest in 2016, shortly after Taylor took charge. It's not a stretch to say, however, that Peltz had been watching the company for some time even before Lafley stepped down and had already spotted some ways the organization's performance could be improved. Trian eventually made it clear that R&D spending wasn't targeted for reduction, and that adding debt wasn't a compelling option. Peltz was even a fan of some of the smaller and localized brands P&G has been shedding. Ultimately, he just wanted a seat in the boardroom to foster greater results-based accountability to continue the good work Lafley and then Taylor began.
He was finally -- yet amicably -- given that seat in 2017, if only as a means of tempering the pressure he was applying to something a bit more palatable and a little less disruptive. Much of what he wanted to happen has happened in the meantime. Chief among those improvements was 2018's sweeping change to the company's corporate structure, which enhanced the accountability and autonomy Peltz had long said is missing.
Proof is in the results, past and projected
It's been a massive, often messy, and painstakingly slow overhaul process that took some outside nudging to make happen. But the work and shakeups have achieved their intended goal. Today's Procter & Gamble is a much more compelling company than it was just five years ago. It's a reality that's been easy to miss, however, just given how slowly the overhaul took shape.
The evidence of this success lies in the trajectory of its numbers. Dismissing the unusual circumstances behind last quarter as well as the echo of the COVID-19 disruption that lies ahead, sales growth is accelerating. So too is profit growth. It's a slow acceleration to be sure, but P&G is a massive company. Changes take time.
Data source: Thomson Reuters/Refinitiv. Chart by author.
As was noted, it's still a boring company. There's only so much pizzazz one can create with dishwasher detergent and mouthwash. The slow-moving Procter & Gamble has still quietly become a consumer staples monster nobody wants to stand in front of, though, making PG shares the best-of-breed stock in the business again. The coronavirus contagion, if anything, might actually help it once the dust settles and its tech-based marketing effort starts to bear fruit.
Yes, you'll pay something of a premium for it. Don't sweat it. Quality is worth the added cost. It usually pays for itself.
