"Other guys read Playboy. I read annual reports."
-- Warren Buffett

I'm not quite as fanatical as Warren, but I do enjoy digging into a company's annual report (called a 10-K) to learn something new. Especially for companies I own.

Over the next few weeks I'll be reading the 10-Ks of all the companies I own shares in, first page to last.

First up: Procter & Gamble (NYSE:PG). Here are five things I learned from P&G's annual report (which you can read here).

1. It has a huge reliance on Wal-Mart (NYSE:WMT)I always knew Wal-Mart sold a large amount of Procter & Gamble's products, but I didn't know exactly how much. The figure shocked me. 

"Sales to Wal-Mart Stores, Inc. and its affiliates represent approximately 14%, 15% and 16% of our total revenue in 2012, 2011 and 2010, respectively."

That's huge. Think about it: P&G is one of the world's largest consumer-product companies, and one retailer is responsible for one-sixth of its sales.

"No other customer represents more than 10% of our net sales," the 10-K reads.

For perspective, Asia made up 18% of Procter & Gamble's total sales in 2012, while Latin America made up 10%. So, Wal-Mart alone sells 40% more Procter & Gamble products than are sold in all of Latin America.

2. Without international exposure, the company would be a mess.
Take a look at this table:

Net sales (in billions)


United States











P&G's total sales are growing -- but barely. And what little growth it is squeaking out is coming entirely from overseas.

That highlights two points. One, diversification is one of this company's key strengths. Two, U.S. consumers don't have nearly the appetite for brand-name products that they used to. Generics sold by companies like Costco have gained consumers' attention.

3. Advertising isn't working like it used to.
Why would anyone buy expensive laundry soap when the cheap bottle of generic probably works just as well? Because Procter & Gamble spends a fortune on advertising to convince consumers that its products are worth the money.

Problem is, the effectiveness of its advertising seems to be waning. Over the last five years, revenue growth has slowed while advertising as a share of revenue has increase. In other words, the amount of additional sales it gets from additional marketing is dropping: 







Revenue growth






Advertising as a percentage of sales






The key to P&G's future is maintaining the quality of its brands, and the most effective way to do that is through advertising. I suspect consumers will be more responsive to advertising when the economy picks up and employment growth returns, but the current trend isn't encouraging.

4. There's a lot of variance in margins among its internal divisions.
P&G splits its business up into five divisions: beauty, grooming, health care, fabric care, and baby care.

I assumed all would have roughly similar margins, given the common denominator of "premium household goods." But there's actually quite a bit of variance, with grooming pulling in nearly double the margin of beauty:


2012 net earnings margin







Fabric care


Baby care


Most of the outperformance in grooming can likely be explained by Gillette's massive market share. "Our global blades and razors market share is approximately 70%," the annual report says.

5. Two sentences explain a large part of why the company has made a great investment.
Procter & Gamble has produced an average annual return of 12.14% per year since 1968. This is largely thanks to the pricing power of its brands, but two sentences in its annual report also explain part of the gain:

Our first discretionary use of cash is dividend payments ... [2012] is the 56th consecutive year that our dividend has increased. We have paid a dividend in every year since our incorporation in 1890.

Some companies are run for the benefit of management. Others will move mountains to take care of outside shareholders. P&G is the latter, and it shows.