Procter & Gamble (PG 0.63%) recently announced an earnings update that raised some big questions about the consumer staples giant's future. While sales are still on pace to grow this year following solid gains in each of the last two years, volumes are falling, and soaring costs are pinching profitability.

Let's dive into the latest report with an eye toward whether it changes the investing thesis for this dividend stock.

Sales volumes

P&G posted a solid 7% organic sales increase that kept it right in line with the growth rate that investors saw over the prior 12-month period. However, looking deeper at that core metric reveals some warning signs.

Volume declined in four of P&G's five units, for example, with the biggest drop coming in its fabric and home care division. The grooming segment was the only one to post higher sales volumes, which edged up by just 1%. Growth came entirely from price increases, in other words, which offset those volume declines.

P&G also faced huge headwinds from an appreciating U.S. dollar. This move pushed reported sales growth to just 1% for the period that ended in late September. It is a "very difficult cost and operating environment," CEO Jon Moeller said in a press release.

Strong finances

P&G made the best of this bad situation on the financial side. Gross profit margin shrank due to rising costs and supply chain challenges. But the company was able to offset nearly all of this slump through cost savings in other areas of the business. Overall, the operating margin held steady after accounting for currency exchange shifts. That's a major win, given all the pressures on earnings right now.

PG Operating Margin (TTM) Chart.

PG Operating Margin (TTM) data by YCharts.

Despite those challenges, P&G is still able to convert roughly 25% of sales into operating profit, which demonstrates its industry-leading financial strength. Cash flow was similarly impressive. P&G converted $3 billion, or 99% of its earnings, into free cash flow.

The outlook

As a result, management sees no challenge in meeting P&G's goal of delivering over $9 billion to shareholders through dividends and stock buybacks in fiscal 2023. The rest of the company's outlook was also bright. P&G affirmed its full-year organic growth target while lowering its reported sales figure due to currency exchange rate shifts. The earnings outlook received a similarly focused downgrade, falling only on a non-currency-adjusted basis.

Investors should view this update as very positive, given all of the challenges that the consumer staples industry is facing right now. Shoppers are being squeezed by inflation, costs are rising, and economic growth is slowing in several major markets. Despite these issues, P&G is expanding sales, protecting earnings, and positioned to deliver tons of cash to shareholders.

While the next few quarters might look weaker than investors have seen in the past two years, that's no reason to abandon this stock. P&G generated strong returns for investors before the pandemic and through the last two fiscal years. It is highly likely to continue that positive momentum into 2023 and beyond.