It wasn't too long ago that consumer goods giant Procter & Gamble (NYSE:PG) was considered down and out, struggling to turn its business around. That effort started to pay off before 2020, but it got a real shot in the arm in the third quarter thanks to the fast-spreading coronavirus pandemic. Looking forward, will P&G keep winning in 2021?
2020 ended up being a good year
The consumer staples area isn't exactly known for being an exciting sector of the market, but in 2020, companies that made things like toilet paper, cleaning products, and personal care items put in a fairly strong performance. Thank the novel coronavirus for that, as people spent more time at home and heightened their cleaning regimens. Procter & Gamble did better than many, gaining roughly 11% or so compared to a roughly-7% gain for Consumer Staples Select SPDR ETF with just a couple of days left before the ball drops.
To be fair, Procter & Gamble lagged the S&P 500 Index as the year drew to a close, but it was ahead of that broad index for a good portion of the year. It was only in the last two months or so that the S&P rallied ahead of P&G. So all in all, 2020 was a strong year for the stock. It was also a solid year for the business. Organic sales were up 6% in the calendar first quarter of 2020 (which was P&G's fiscal third quarter), 6% in the second quarter, and 9% in the third quarter of the year. Those are pretty impressive numbers for a company that sells staple products like Bounty towels and Charmin toilet paper.
However, a material portion of the excitement about the stock is likely related to the coronavirus pandemic. But P&G was already entering 2020 on a strong note: Organic sales in the final quarter of 2019 (P&G's fiscal second quarter) were up 5%. The quarter before that, organic sales were up 7%. Calendar year 2020 was good, but it wasn't exactly out of line with the prevailing sales trend. To be fair, a lot of companies struggled to sustain sales during the COVID-19 related lockdowns, so it was impressive that P&G managed to maintain its momentum. But it perhaps wasn't as special as investors might like to believe.
An inevitable slowdown for P&G?
The question now is what does 2021 hold? And the answer is likely to be, at best, more of the same. Indeed, the company is quick to note that the pandemic created headwinds as well as tailwinds. For example, its shaving and deodorant businesses faced pressure as more people stayed at home (and didn't "freshen up" for work), while its cleaning products benefited. Meanwhile, some regions of the world were better off than others. The overall picture was positive, but the underlying trends weren't all in the plus column.
When Procter & Gamble reported fiscal first-quarter earnings it upped its fiscal 2021 organic sales guidance to 4% to 5%. However, that's notably below the 9% rate it achieved in the fiscal first quarter (which was the calendar third quarter of 2020). That suggests that we may have seen a high-water mark. Moreover, as the company laps big sales gains, it gets harder and harder to maintain growth. That's just simple math -- but it could get even more difficult to grow if coronavirus vaccines lead consumers to go out more and reduce their diligence on the cleaning front.
All in all, Procter & Gamble will likely have a very solid year in 2021 business-wise. But it could easily fall off from 2020 levels, which the company's own projections hint is highly likely. That suggests that investors may not see 2021 as a winning year, and, as the stock performance since the company's October earnings release shows, shares could lag. To put some numbers on that, the stock is down around 2.5% following its October earnings release, while the broader consumer staples sector is up 3% and the S&P 500 index is up 8%.
Don't abandon the P&G ship
Investors shouldn't be shocked if P&G's laggard share performance continues into calendar year 2021. However, that's really about investor sentiment, not business performance. P&G is still expecting to do quite well on the sales front in the first half of the year as it closes out its 2021 fiscal year. And while the valuation here (the trailing P/E is a lofty 26 times or so) is high, long-term income-focused investors shouldn't jump out of a company with an over-six-decade-long streak of annual dividend increases because of business variations from year to year. Short-term ups and downs are common, but the long-term success P&G has achieved is pretty incredible -- and it doesn't look like the company has lost its edge just yet.