With many well-known household products in various categories, like Head & Shoulders shampoo, Crest toothpaste, Tide laundry detergent, and Bounty paper towels, Procter & Gamble (PG 1.04%) needs no introduction. The business, founded in 1837, sports a current market cap of $371 billion.
This consumer staples stock has been a huge winner. If you invested $10,000 in Procter & Gamble 40 years ago in February 1984, you'd be sitting on a monster balance today of more than $1.4 million, including dividends. This gain demonstrates the power of compounding over long periods of time.
Below is a look at the factors leading up to the stock's impressive performance. Then you can determine if this business is a smart investment today.
The power of a strong brand
For a company to have outsized gains like this one, the underlying fundamentals must be strong. Procter & Gamble has consistently produced steady growth. Just between fiscal 2018 and fiscal 2023, revenue and diluted earnings per share (EPS) increased at compound annual rates of 4.2% and 10%, respectively. This certainly helped propel the share price.
What's noteworthy is Procter & Gamble's ability to stay relevant over such a long stretch of time. Only companies that have a wide economic moat can achieve this.
The products that I previously mentioned, as well as the dozens of others the business sells, carry tremendous brand recognition in the industry. This has resulted in Procter & Gamble having a dominant market share versus its rivals in key product categories. The company owns 24 brands, which make more than $1 billion in annual sales.
From the consumer's perspective, once a household has an affinity toward a certain item and knows it works, it will become a habit. And this leads to tremendous loyalty, which is what has maintained the company's industry position. Procter & Gamble has historically had no problems occasionally raising its prices.
The technology and internet sectors are characterized by lots of competition and constantly changing landscapes. The threat of disruption is always something executives must worry about, even megacap enterprises.
In this instance, I'd say there is minimal threat to Procter & Gamble ever losing its standing in the marketplace. And this supports its durability. In other words, I have confidence the business will still be around decades from now.
NYSE: PG
Key Data Points
Is this a good stock to buy right now?
At the company's current scale, I think it's safe to assume that the stock's forward gains won't look anything similar to the past. But over the next five years, does Procter & Gamble have a shot at producing market-beating returns?
The company isn't immune to the uncertain macroeconomic environment. The brands are strong, but the business saw organic product volume dip 1% in the most recent fiscal quarter (Q2 2024 ended Dec. 31). Price hikes helped drive an increase in sales of 3%, though.
Management expects core EPS to rise between 8% and 9% this fiscal year, which would represent healthy growth. But I think investors shouldn't expect double-digit gains from this business going forward.
As of this writing, the stock trades at a price-to-earnings ratio of 26.4. That's about in line with its trailing-three-year average -- but it's a sizable premium to the S&P 500. The stock might be a bit on the expensive side of things right now.
Investors might be intrigued because of the safety and consistency that this company provides and its ability to generate lots of free cash flow. Add to this a steadily declining outstanding share count and a dividend yielding nearly 2.4%, and maybe Procter & Gamble is the foundational stock you've been looking for.
