There's no denying The Procter & Gamble Company (PG -0.78%) is a stalwart. Indeed, it epitomizes the very definition of a blue-chip stock. It's been around forever, having evolved into a titan within its industry. Investors could certainly do worse.
If you were forced to make a decision on Procter & Gamble stock today, however, what would it be? This thought exercise can be helpful. So here's a well-reasoned walk-through of the process, with some conclusions for those who aren't sure what to do with Procter & Gamble right now.
P&G's dominance is worth the price alone
On the off-chance you're reading this and don't know, Procter & Gamble is a massive consumer goods company. It is parent to Tide detergent, Pampers diapers, Bounty paper towels, Gillette razors, and Crest toothpaste, just to name a few of its popular products.
Many of its goods are category market leaders too, particularly now that the company has shed certain lines so it could focus on its top opportunities. At last year's Investors Day event, CEO Jon Moeller noted "Our 10-category portfolio has historically grown a point faster and is two points more profitable than the old company." He added that "we are global market leaders in 7 of the 10 categories and are #2 in the other three."
The stock is up for the past year, and for three-year and five-year time frames as well. Clearly, Procter is doing something right. But does that make the stock worth betting on right now? In a word, yes.
Don't misunderstand. Priced at 24 times this year's expected per-share profits and more than 22 times next year's projected earnings of $6.89 per share, P&G is anything but a value play. That's more in line with growth-stock valuations even though this year and next year's top-line growth should be on the order of 4%, mirroring its longer-term revenue-growth trend.
It's tough for a company with Procter & Gamble's size and dominating market share to generate meaningful sales growth. Its shares are still worth their premium price, however, for a trio of reasons.
Three key arguments for owning P&G stock
The first of these reasons is its reliability. While not every year is better than the prior one, this company isn't one that's held down for very long. The fourth quarter of last year was the first time in several years P&G was unable to produce top-line growth, yet organic sales were still higher -- to the tune of 5%. The reported decline merely reflected adverse foreign currency exchange rates.
PG Revenue (Quarterly) data by YCharts.
The second key reason to buy Procter & Gamble stock despite its relatively steep price is its sheer size, or more specifically, what its size allows the company to do. This isn't always the case. There are plenty of instances where being smaller and nimbler is a competitive advantage -- but not when it comes to the consumer goods business.
In this industry, size matters. Not only does greater scale help keep P&G's per-unit production costs lower, it also gives the company leverage when negotiating prices with retail partners. P&G's operation also affords it one of the world's very biggest marketing budgets that rivals like Unilever (NYSE: UL) and Clorox (NYSE: CLX) just can't match. This spending creates demand from consumers at the same time P&G is incentivizing its distributors to promote its brands. Retailers, of course, love the additional foot traffic that P&G's promotional spending creates.
And if you're still not convinced, the third bullish argument just might do the trick. The current consensus-target price for Procter & Gamble stock stands at about $168. That's 10% above the stock's actual price right now.
And bear in mind that target prices often rise before they're ever actually met. Given that most analysts also currently rate P&G shares a buy, don't be surprised to see this stock end up chasing a rising consensus target as this year turns into next year.
Don't make it more complicated than it needs to be
This is just a bullish thesis, of course. Things could change -- for the worse. Inflation could turn rampant. The economy might implode so much that consumers stop paying a premium price for top-tier, name-brand goods. Competitors might sneak in and de-throne Procter & Gamble's commanding market leads. Never say never.
As an investor, however, you also have to be as realistic as you are reasonable. Those things aren't likely to happen. If they were, they arguably would have done so by now. Rather, recognize P&G's long history of keeping potential pitfalls and competitors in check and the stock's resulting long-term bullishness.
The premium valuation is worth it. The bullish argument really is as simple as that.
