It might be time for investors to start loving Procter & Gamble (PG -0.78%) stock again. The consumer staples giant in January announced good news regarding its sales and profits trends, sprinkled in with a few disappointing factors impacting returns.
Shares jumped in response to the quarterly update, yet the stock is still trailing the market over the past 12 months. Let's look at a few reasons why investors might want to take advantage of that discount, and one big reason to hold off for now.
Pricing power
A big concern heading into this report was that P&G might be approaching the limit of its pricing power. Shoppers have been dealing with rising prices for over a year and are increasingly looking for ways to cut spending. Yet P&G did a lot to ease that worry this past quarter. The company was able to pass along its rising raw material costs without a hitch in the fiscal Q2 selling period that ran through late December. In fact, Prices were up 4% overall thanks to big boosts in brands like Tide, Crest, and Bounty.
These gains powered a 4% organic sales increase, keeping P&G on track for good growth this year following last year's spike. Sales should rise by between 4% and 5% in fiscal 2024 on top of the 7% boost from fiscal 2023. "We delivered strong results in the second quarter," CEO Jon Moeller said in a press release. Wall Street apparently agreed, as the stock is up following the report.
Rising profits
Earnings were pinched last year as costs rose faster than prices, but the reverse is happening right now. Raw material inflation slowed significantly in recent months even as P&G's 2023 price hikes continue to boost sales.
Toss in cost cuts, and you've got a recipe for strong profit expansion and continued positive returns for shareholders. P&G's gross profit margin jumped by nearly 6 percentage points last quarter, helping lift operating profitability by nearly the same amount. Earnings per share rose 18% after adjusting for currency exchange rate shifts. That's an impressive rate for any business to manage, especially one that generates over $20 billion of quarterly sales.
Watch sales volumes
Investors will want to watch for more concrete signs of a demand rebound in the coming quarters. Sales volumes have been declining for several consecutive quarters, after all, and that's not a sustainable situation because it leaves P&G relying on price hikes to fuel all of its organic growth. While it's good to see pricing power at work, investors would prefer a healthier balance between rising prices and sales volumes.
It is likely that this balance will return over the next few quarters, especially if consumer spending trends continue improving. And in the meantime, P&G shareholders can patiently collect a dividend that will likely rise again this spring to mark its 68th consecutive boost. You don't put together a track record like that without having a few massive competitive advantages, including scale, dominant market share, and a stellar track record for innovative product releases.
These factors should keep boosting shareholder returns over time, even if P&G's sales volumes look sluggish over the next several quarters.
