April is a busy month for investors in Procter & Gamble (PG -0.66%). The consumer staples company will announce third-quarter earnings results on April 21. Management also typically reveals its annual dividend hike around that time.
The earnings update will include P&G's revised outlook for a fiscal year that's bringing further demand pressures but easing cost and supply chain challenges. Let's look at how these factors might set shareholders up for solid returns in 2023 and beyond.
Mixed momentum
The main worry heading into the earnings report is that consumers are getting more cautious in their spending. Sure, P&G reported a solid 5% increase in organic sales in the most recent quarter. But looking beyond that headline figure reveals sales challenges.
P&G's sales volumes fell 6%, in fact, through late December. Each of its five main product categories shrank, led by the grooming division's 8% slump. The company offset that slump with a 10% price increase that allowed overall organic sales to rise. Yet that strategy has limits, and so investors will be watching the upcoming report for signs of a better balance between volume and pricing trends.
Profits and cash returns
P&G stock might get a lift from the company's improving financial position. A key benefit to raising prices is that it protects the company's profit margin, after all, which has held roughly steady this fiscal year after accounting for currency exchange swings.
The fact that P&G is beating rivals like Kimberly-Clark on this score reflects its premium market position, pricing power, and economies of scale. These competitive assets should help the company generate strong returns even if a recession develops in key markets like the U.S. and Europe.
PG operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Lastly, shareholders should see a dividend raise that reflects P&G's modest earnings expansion this year. This increase will mark the company's 67th consecutive annual increase, extending one of the longest such streaks on the stock market.
Looking ahead
The biggest factor influencing the stock's path will be management's updated outlook. Heading into the report, P&G is calling for organic sales to rise by 4% to 5% this year, while net earnings rise by 2% to 4%. Positive signs here would include more modest declines in sales volume and a potential letup in cost pressures.
P&G's last estimate forecast a whopping $3.7 billion hit to earnings this year from rising costs. But that prediction was a slight improvement from the prior quarter, and further good news on this score might point to strong profit gains into the new fiscal year.
The stock's valuation has remained elevated this year, trading at nearly 5 times sales compared to Kimberly-Clark's price-to-sales ratio of 2.3. There's room for that valuation to rise, though, if sales volumes stabilize and profitability starts expanding.
On the other hand, shares could underperform over the next year if consumers become even more cautious in their spending for staples like laundry products.
In any case, P&G's long-term outlook is bright. The dividend giant should deliver good returns to patient shareholders, even if the next few quarters show unusually sluggish sales trends.
