It might be time to get excited about Procter & Gamble (PG -0.78%) stock again. The consumer staples titan recently announced strong quarterly earnings results highlighted by quickly rising organic sales and expanding profit margins.
Looking beyond those headline numbers reveals some positive and not-so-positive trends for investors to watch as they consider adding this dividend giant to their portfolios. Let's dive right in.
Steady volume trends
The biggest knock against the business in recent quarters has been P&G's reliance on price increases to drive all its growth. While that strategy demonstrates valuable pricing power, it isn't sustainable over long periods. And with inflation subsiding into late 2023, P&G won't have much room to keep boosting prices for long.
The good news is that volume trends are holding up well. Sales volume was down just 1% across the portfolio this quarter, matching the previous quarter's decline and keeping P&G within striking distance of a return to growth.
A 7% increase in average prices, combined with a 1% benefit from higher demand for premium products, resulted in a 7% boost in overall organic sales. That was good enough to edge past management's short-term outlook. "We delivered very strong results," CEO Jon Moeller said in a press release.
Reduced financial pressures
The other green flag is P&G's improving finances. The company has always been a leader in this department. Profit margin last year was nearly 10 percentage points above that of rival Kimberly-Clark (KMB -0.87%). And P&G is extremely efficient in converting almost all its earnings into free cash flow.
PG Operating Margin (TTM) data by YCharts
Yet its profit trends are looking up. Cost cuts and price increases are helping on this score, but P&G is also getting a big boost from declining commodity costs. After spiking for the past year, inflation is coming back down for many key materials, helping operating profit margin rise by 3 full percentage points after currency exchange rate swings are accounted for. Net earnings per share were up a robust 17% through late September.
Outlook and price
These mostly positive trends helped convince management to issue a somewhat brighter outlook for the 2024 fiscal year. Sales are on track to hit the high end of P&G's forecast calling for organic revenue to grow by as much as 5% this year following last year's 7% spike. The earnings picture held steady, but only because foreign exchange rate shifts are mostly offsetting the nearly $1 billion decline in commodity costs that are lifting profits.
These trends don't signal a quick return to the type of heady earnings gains that shareholders saw through most of the pandemic. P&G still faces challenges, as consumer spending is muted compared to last year. But there's a good chance that volume growth will return soon, especially as pressure to keep raising prices eases. Combined with those cost cuts, earnings have an excellent shot at continuing to surge in 2024 and beyond.
That's why the stock seems more attractive right now. It is valued at 4.5 times annual sales, down from 5.5 times sales earlier this year. There's a similar discount when it comes to the P/E ratio, which has declined to 25 from 30 at the start of the year. Toss in the company's 2.5% dividend yield, and there's a lot to like about P&G as a long-term investment option.
