Judging by its stock price performance this year, you might think Procter & Gamble's (PG -0.78%) business was done growing. The consumer staples powerhouse sat out of the wider market's rally, falling slightly through late June compared to a 14% year-to-date surge in the S&P 500. That's an even worse performance than peer Kimberly-Clark (KMB -0.87%), which was up by about 1% over that time.
It's true that P&G stock is going through a demand slump right now as it rolls out price increases while consumer spending has been under pressure. But the long-term picture remains bright for this dividend payer. Three big factors point to excellent returns ahead for P&G shareholders.
1. P&G still has pricing power
Pricing power is a key sign of an unusually strong business, and P&G has it in spades. Its gross profit margin rose by 2 full percentage points in the most recent quarter at a time when many consumer staples companies are struggling to pass along their rising costs to consumers.
P&G was able to boost prices at a faster pace than Kimberly-Clark this past quarter, and its organic sales volume shrank at a more modest pace, too. These trends resulted in 7% higher overall sales compared to Kimberly-Clark's 5% boost.
"We delivered strong results ... in what continues to be a very difficult cost and operating environment," CEO Jon Moeller said in the company's most recent quarterly earnings press release.
2. High margins suggest P&G has efficient operations
P&G's bottom line results are even better. Its operating profit margin is holding above 20% of sales right now, while Kimberly-Clark's fell to below 14%.
PG Operating Margin (TTM) data by YCharts.
Success on this score is good news for shareholders for several reasons, including how it impacts P&G's cash return program. The company now expects to pay around $9 billion in dividends this year while allocating as much as $8 billion toward stock buybacks. And P&G's margins have a good chance of rising over the next few quarters, too, as inflation moderates.
3. Cheaper shares
There are two upsides to P&G's declining stock price in 2023. The first is that it now trades at a cheaper valuation, likely laying the foundation for solid returns ahead. Shares are valued at about 4.5 times annual sales, down from closer to 5 at several points over the last few years. That's still a large premium compared to Kimberly-Clark, though, which is trading for about 2.3 times sales today.
P&G's dividend yield has also risen slightly thanks to the combination of that fairly flat stock price and a boosted payout. The 2.5% yield should be considered a solid bonus for owning this stock, in addition to the other cash returns headed shareholders' way through stock buybacks over the next few years.
Overall, there are good reasons to consider adding P&G to your portfolio while sentiment around the business is temporarily low. It's a market share leader in numerous product categories, it's still growing sales and boosting profits, and continued success along these lines should support market-beating returns for patient investors over the long term.
