Procter & Gamble (PG -0.80%) sells some of the most iconic consumer products brands in the world, including Bounty, Tide, and Oral-B, among many others. The big benefit of that is the loyal customer base that the company's brands have. But with inflation raging and price hikes coming fast and furious, customer loyalty is being tested. Still, it looks like Procter & Gamble is navigating these choppy waters and doing a great job for investors.
A balancing act
Inflation has been a huge problem for consumers and companies for a year or so now. The relationship between these two groups is tight, because as companies face higher costs for raw material, labor, and shipping they have little choice but to pass that on to consumers or accept tighter margins. The higher costs facing consumers, meanwhile, make it difficult and/or less desirable to buy the products they know and love.
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This is the balancing act that P&G has been playing as it looks to protect its margins. It had been doing a particularly good job for a long time, with volume increases even as it raised prices. Part of that story is that the consumer staples giant is heavily focused on innovation, so that it tries to provide value that is worth the extra cost. This is a long-term focus for the company, which has a portfolio of higher-end products.
Over the last seven quarters, the company's organic sales growth has been in the mid- to high-single digits. However, in the fiscal second quarter of 2023, volume fell 6%, pushing organic growth to the low side of its recent range at 5%. The volume decline, more notably, was twice the drop of the fiscal first quarter, suggesting that Procter & Gamble had reached a pricing "tipping point" with consumers.
There may still be more room to run
In the fiscal third quarter, however, the volume decline dropped back to 3%. That left organic growth in the middle of the company's recent range at a very respectable 7%. While one quarter doesn't make a trend, it looks like the fiscal second quarter may have been the aberration.
To be fair, any volume decline is unfortunate and hints that Procter & Gamble needs to tread with caution as it looks to raise prices. So management continues to walk a tightrope here. But it appears the company is still doing a fairly good job passing its rising costs on to consumers, all things considered.
It's also worth highlighting that P&G updated its top-line guidance for fiscal 2023. Previously it had been calling for sales to be flat to down 1%, but it now expects sales to be up 1%. That's not exactly a huge change on an absolute basis, but directionally it is quite important. The company basically went from expecting fiscal 2023 to be a down year to now expecting it to be an up year.
The company has once again proven that it can weather tough times by relying on its strong portfolio of iconic brands. That is the underpinning of the company's incredible 67-year streak of annual dividend increases. You don't become a Dividend King by accident, and Procter & Gamble's ability to adeptly navigate the inflation headwinds it is facing is proves this point.
Shareholders should be pleased
With a 2.4% dividend yield, toward the low side of the historical yield range, P&G doesn't exactly look cheap today. So value investors probably won't want to buy this stock and dividend investors may not find it all that attractive relative to options like a virtually risk-free high-yield CD.
If you are a shareholder, the company's business is clearly holding up very well. Mr. Market, however, can be fickle. If you don't own Procter & Gamble, you might want to put this well-run company on your wish list, just in case there's an indiscriminate sell-off and the yield moves into the 3% range. You could still get a higher-yielding CD, but a CD won't provide you with dividend growth to offset the ravages of inflation on your portfolio.
