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Why Procter & Gamble Is Cautious About 2021

By Demitri Kalogeropoulos – Aug 11, 2020 at 11:45AM

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The consumer staples giant sees slowing growth ahead.

Investors liked what they heard from Procter & Gamble (PG 2.04%) last week as the company closed out its best fiscal year in over a decade. Sales gains beat management's target for the fourth consecutive quarter, and cash flow and profitability each ticked higher.

Management is optimistic about maintaining the positive momentum but expects a few of these key metrics to worsen in fiscal 2021, which started on July 1. CEO David Taylor and his team broke down the factors behind their updated outlook in a conference call with investors, and below are a few highlights from that presentation.

A person cleans a kitchen counter.

Image source: Getty Images.

Keeping promises

CFO Jon Moeller said: "We delivered or overdelivered on each of our going-in targets for the year: organic sales growth, core earnings-per-share growth, free-cash-flow productivity, and cash return to shareowners. We built strong momentum heading into the COVID-19 crisis and arguably built this further during the challenging second half of the year." 

P&G took a well-deserved victory lap after sales gains landed at 6% in fiscal Q4 to push the full-year total to 6%, significantly higher than the upgraded 4.5% boost management had predicted just three months ago.

The bigger picture is even brighter, though. On a two-year stack basis, which smooths out short-term bumps, organic sales gains have accelerated from 6% to 11%. P&G noted that this success was evident even before the coronavirus pandemic boosted demand in some key categories like cleaning and laundry supplies. The company gained market share, too, with organic growth up 19% in the U.S. compared with Kimberly-Clark's (KMB 2.44%) 12% spike.

Cost cuts are even more important

Taylor said: "The strategic need for this [growth] investment, the short-term need to manage through this crisis, and ongoing need to drive balanced top- and bottom-line growth, including margin expansion, underscores the importance of productivity. We're driving cost savings and efficiency improvement in all facets of our business, delivering strong costs and cash productivity."

P&G has been aggressively slashing costs since 2012, but that initiative is, if anything, speeding up. The COVID-19 crisis has raised manufacturing and supply-chain expenses and threatens to add extra pressure on things like pricing while economies around the world struggle with high unemployment. At the same time, the industry is getting more competitive.

Investors can see fiscal 2020 results as evidence that P&G can invest aggressively in growth strategies like innovation, marketing, and packaging, while still boosting profitability. "We're holding ourselves to an expectation of meaningful growth," Moeller said, "and expect to be highly cash generative."

A challenging selling environment ahead

"The reality is, that COVID-19 cases are increasing in many parts of the world, without the resources or infrastructure to effectively manage it," Moeller said.

P&G forecast that organic sales gains will slow to between 2% and 4% compared with the past year's 6% spike. That forecast is more than just the standard case of trying to underpromise and overdeliver, though.

Executives see major challenges ahead, including the potential for a global recession and/or double-digit unemployment in many parts of the world. Reduced consumer mobility could amplify those issues, even as it lifts demand for things like home laundry care.

But P&G is still predicting significant growth in 2021 that translates into additional market share. Executives see profitability improving as earnings grow by between 3% and 7%.

There's plenty of room for those forecasts to change as economic trends become clearer. But in any case, investors can expect to see robust direct cash returns, with dividends and stock buyback spending totaling $15 billion, or about the same level as in fiscal 2020.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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