Investors don't get many opportunities to buy stellar businesses at attractive prices. These companies tend to exhibit obvious competitive advantages that make them popular on Wall Street, even when markets decline.
Procter & Gamble (PG 1.09%) seems to fit right into this category of excellent businesses that fetch a high premium. Shares are trading just below the all-time high of $165 that was set back in late 2021. P&G is valued at a premium compared to peers like Kimberly Clark (KMB 0.51%), even while sales growth is sluggish.
Can investors still see solid returns from owning this consumer staples giant over the long term? The short answer is yes, but patience will likely be a critical part of the process. Let's dive right in.
Winning market share
In late January, P&G confirmed its fiscal year outlook, which calls for slower growth in the coming quarters. Organic sales gains are on track to land at 4%-5% in 2024, down from a 7% jump last year.
NYSE: PG
Key Data Points
The main difference appears to be price increases, which have slowed in recent months. P&G was able to pass along higher costs to consumers in 2023 by hiking prices across franchises like Tide detergent, Bounty paper towels, and Pampers diapers. Yet the financial lift from those boosts is fading, and to date there hasn't been much change in demand. Volume fell at the same 1% rate last quarter as it did in the previous three-month period even though price increases slowed to 4% from 7%.
The good news is P&G is outperforming Kimberly Clark and holding market share in a tough sales environment. Management said global market share edged up by about 0.5%. That success is exactly what investors hope to see from the industry leader.
Leading profits
P&G generates world-class earnings even though it operates in the highly competitive consumer staples niche. Profit jumped a blazing 16% last quarter after adjusting for one-time write-down charges. And remember, that boost came even as price increases slowed down.
PG Operating Margin (TTM) data by YCharts
Investors can expect to see further improvements ahead in earnings and P&G's strong cash flow trends. The company is still finding room to cut costs, for example, as you can tell from its rising gross profit margin.
Cash returns and the premium
The biggest drawback to P&G's stock is its elevated share price. Currently near $165, you're paying just under 5 times annual sales. You could own Kimberly Clark (which is less profitable and growing more slowly) for a relative steal of 2 times sales. The industry's No. 2 player also pays a heftier dividend yield of 4% compared to P&G's 2.4%.
Those factors might have many investors staying on the sidelines as they watch P&G's stock and wait for a better price. It's always possible that a market downturn generates a screaming buy opportunity that reduces the stock price and increases P&G's dividend yield.
Yet P&G's stubborn premium sticks around for good reasons. It has a long history of steadily winning market share in a huge global industry. And with over 100 years of dividend payments under its belt, investors can feel especially confident that they'll see rising income payments from this business.
If you're not looking to compromise in areas like stability, profitability, efficiency, and market position, then it's hard to go wrong with Procter & Gamble stock. Even near all-time highs, the stock should deliver impressive total returns (capital appreciation plus dividends) for patient shareholders.
