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Inflation Will Hit This Dividend Stock to the Tune of $1.9 Billion

By Parkev Tatevosian, CFA – Sep 22, 2021 at 7:55AM

Key Points

  • Procter & Gamble projects rising prices will lower earnings per share by 12% in fiscal 2022.
  • The consumer goods maker has already planned price increases to offset the impact of rising costs.
  • Procter & Gamble is hoping competitors follow suit and raise prices as well.

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The U.S. Bureau of Labor Statistics said consumer prices increased by 5.3% in the last 12 months.

Inflation has been above average lately and it's hitting consumers and businesses alike. The coronavirus pandemic is causing volatility in both the supply and the demand of plenty of products. An outbreak at a manufacturing facility could temporarily restrict the supply of critical inputs. An increase in coronavirus infections caused by a new variant could lower the demand for certain services. 

For the most part, price changes are trending higher. Indeed, the U.S. Bureau of Labor Statistics reported consumer prices increased by 5.3% over the last 12 months. The metric measures prices for a basket of goods, including food, energy, and apparel. Even global consumer packaged goods giant Procter & Gamble (PG -0.68%) is not shielded from rising prices. The company said inflation could cost the company $1.9 billion in its fiscal 2022. 

Several cleaning products in a bucket on a table.

Image source: Getty Images.

Inflation could lower earnings per share by 12% 

This will not be the first effect of inflation pressure for Procter & Gamble since the pandemic's onset. Even in its most recent quarter, inflation had a substantial impact, costing the company nearly $400 million. To give the figure some context, sales in the quarter were $18.9 billion.

Looking forward to the fiscal year 2022, here is what Chief Financial Officer Andrew Schulten said about rising costs on the Q4 2021 earnings call in July:

Based on current spot prices, we estimate a $1.8 billion after-tax commodity cost headwind in fiscal '22. Freight costs have also increased substantially due to several factors affecting the supply of drivers and the demand for drivers and trucks and diesel fuel prices are up 35% so far in the calendar [year]. We currently expect freight and transportation costs to be an incremental $100 million after-tax headwind in fiscal '22. We will offset a portion of these higher costs with price increases, but there is a lag between the time when costs begin to rise and when pricing is implemented to provide an offset.

Impressively, the company estimates it can grow earnings per share (EPS) in the range of 3% to 6% in fiscal 2022, inclusive of the cost pressure. The effect will be meaningful considering the 12% headwind to EPS growth. 

A person spraying a cleaning product and wiping down a surface.

Image source: Getty Images.

What this could mean for investors

Interestingly, management is not expecting the price pressures to ease anytime in its fiscal 2022. Therefore, if there are reverses to the increases, it could be a tailwind for Procter & Gamble's earnings in the year.

Moreover, P&G sent at least two signals to competitors in its most recent conference call: first, it telegraphed that it would be raising prices on its products, and second, it indicated it wants competitors to be more thoughtful on promotional spending. The apparent aim of these messages is to inform the market of its actions so competitors can raise prices and reduce promotional spending without fear of losing market share.

Without the signal, competitors could hesitate in raising prices out of fear P&G would not do so. In this way, P&G could be aiming to burden consumers with higher prices while maintaining profit margin for itself and the industry at large. 

Parkev Tatevosian 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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