A good rule of thumb for investors is to avoid putting money into the stock market that you might need within the next three years. Bear markets are frequent and occur without warning, after all, even as long-term returns tend to be predictably high. As a result, your confidence of positive returns should generally rise as your investing horizon stretches on into several years or longer.
With that big picture in mind, let's look at the prospects for Procter & Gamble (PG 0.54%) shareholders over the intermediate term. There are some good reasons to expect market-beating returns for this stock, even if it looks a bit expensive today.
The start of a pullback
Procter & Gamble's last quarterly update illustrated why so many investors see it as an excellent stock to hold during turbulent economic times. Organic sales rose at a robust 7% through late March. These gains came despite quickly rising prices and weaker consumer spending across many niches.
P&G is outperforming rivals like Kimberly-Clark on growth, but there are signs of weakness here. Sales volumes have been negative for nearly a year as consumers respond to P&G's price hikes. This strategy reflects P&G's pricing power and its dominant position in niches like laundry care and home cleaning supplies. But investors are still hoping to see a return to more balanced growth over the next few quarters.
Profit power
The multi-year outlook is less cloudy around P&G's finances, which are sparkling. Operating profit margin is over 20% of sales, near its pandemic high and well above Kimberly-Clark's 14% rate.
PG Operating Margin (TTM) data by YCharts
P&G remains one of the most efficient businesses around, too. The company routinely converts over 90% of its earnings into free cash flow. Operating cash flow in the past nine months was $12 billion, down only slightly from the prior year's $13 billion. While these metrics would worsen if a recession develops in the near future, P&G's consumer discretionary focus has allowed it to navigate through dozens of such downturns through its long operating history.
Cash flow and value
Investors can also count on direct cash to boost their returns over the next several years. P&G recently hiked its 2023 capital return target to $17 billion, including $9 billion of dividends and about $8 billion in stock buybacks. If you choose to have these dividend payments automatically reinvested, they can amplify long-term returns over time.
The biggest drawback is P&G's elevated stock valuation. The shares are priced at a steep 4.8 times annual sales compared to Kimberly-Clark's P/S ratio of 2.4. That valuation could shrink if growth slows or inflation continues pressuring profits and forces P&G to keep boosting its prices while demand weakens.
Still, it seems likely that the business will be setting new sales and earnings records in a few years, even if a recession temporarily dampens these metrics. Investors who like relatively low-risk stocks with excellent dividends should consider owning P&G through the potentially rocky economic period ahead.
