As of this writing, the S&P 500 is down 14% from its peak level reached in December 2021. But after hitting a recent low in the back half of last year, the broad market index has been moving up, rising about 8% so far in 2023. With this positive momentum, the possibility of a bull market is likely on a lot of investors' minds these days.
In this type of economic environment, investors should take a closer look at Procter & Gamble (PG 0.38%). It should not only benefit if a bull market occurs, but the business can also provide a solid foundation to anyone's portfolio. With that being said, here are three must-know reasons to buy this top consumer staples stock right now.
Popular brands
Perhaps the most obvious reason to like P&G from an investment perspective is its powerful brand competitive advantage. The leading consumer goods business sells products under the names of Head & Shoulders, Old Spice, Oral-B, Pepto Bismol, Tide, Febreze, Pampers, and Charmin, among numerous others. All in, it sells 10 different product categories in over 170 countries worldwide.
Owning a bunch of well-known brands is important because it lets P&G benefit from customer loyalty. Numerous households have developed habits around purchasing a single brand for many years. And this kind of consumer behavior can also help P&G continue performing well when recessionary fears are high. That's because no matter what the economy is doing, people still need to wash their clothes, brush their teeth, and clean their homes, for example.
The business has been around since 1837, so that shows how durable its operations are. Competing and dominating in an industry that doesn't really lend itself to a lot of technological disruption means that P&G is likely going to be doing the same thing and selling the same products decades from now. And this is what shareholders, particularly those that focus on the long term, should appreciate from the companies they own.
A history of rewarding shareholders
Over the past five years, shares of P&G gained 92% in value. That performance tops the S&P 500's 54% rise during the same time. And it's significantly better than some of the company's competitors, like Unilever and Colgate-Palmolive, whose shares are essentially flat over the trailing five-year period. P&G has clearly been a winning stock for investors in the past.
There are two other factors that have helped to boost shareholder returns. P&G has raised its dividend for 66 straight years, with the current yield being 1.8%. This fiscal year, management expects to pay $9 billion in total dividends to investors. And then there are the stock buybacks. The company reduced its outstanding share count by 7% over the past five years, which can bolster earnings per share. P&G plans to spend about $6 billion to $8 billion in fiscal 2023 on share repurchases.
This type of stock performance, as well as the ability to return lots of cash to investors, is only possible thanks to the company's outstanding financial profile. In the most recent fiscal year (ended June 30, 2022), P&G's gross margin of 47.4% and operating margin of 22.2% were both excellent. This demonstrates just how lucrative being in the branded consumer products industry can be. Moreover, the company is able to generate high levels of adjusted free cash flow, to the tune of $13.8 billion last fiscal year, which can be returned to shareholders.
Selling at a historically cheap valuation
Despite its impressive price appreciation over the last five years, P&G shares currently trade at a price-to-earnings (P/E) ratio of 26. This is below the stock's trailing three-, five-, and 10-year average P/E multiples. Investors might be compelled by this discounted valuation.
With a history of market outperformance, management's continued focus on rewarding shareholders, and a strong and resilient portfolio of top consumer brands, owning P&G stock in your portfolio could be a smart move -- especially at a time when economic uncertainty is high.
