Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does consumer goods giant Procter & Gamble (NYSE:PG) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The charts you're about to see tell Procter & Gamble's story, and we'll grade the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Let's look at Procter & Gamble's key statistics:

PG Total Return Price Chart

PG Total Return Price data by YCharts.

Passing Criteria

3-Year* Change


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

0.5% vs. (4.7%)


Improving EPS



Stock growth (+ 15%) < EPS growth

43.3% vs. (0.6%)


Source: YCharts. *Period begins at end of Q1 2011.

PG Return on Equity (TTM) Chart

PG Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Procter & Gamble appears to have lost ground since we first examined it last year -- the consumer goods giant only picked up a single passing grade in its second assessment, down from three in 2013. Dividends are eating up more of P&G's free cash flow than they have in more than a decade, as the company continues to boost payouts in spite of virtually flat revenue and earnings over the last few years. However, P&G's shareholders continue to enjoy solid returns as the stock's valuation grows. Can the company's shares continue to outperform relative to its fundamentals, or will weak growth catch up to it soon? Let's dig a little deeper to find out.

P&G has consistently outperformed Wall Street's earnings estimates over the past few years, but there is not much surprise left there. With those earnings flattening out, P&G's share-price growth has largely been driven by expanding valuation multiples -- a trend that is consistent across the consumer goods industry. P&G reported mixed first-quarter results, as earnings per share increased 5.1% while revenue actually decreased 0.2% year over year. Since major competitor Colgate-Palmolive boosted sales by 6.5% last quarter, this modest progress looks all the weaker. The company could also see a small decline in revenue in the in-progress second quarter due to weak industry growth throughout the year, according to Wall Street's consensus. P&G recently reduced its earnings guidance for the fiscal year, which may pressure its stock in upcoming quarters, particularly if these low expectations aren't met.

My fellow Fool writer Dan Caplinger notes that P&G has been trying to focus more on in-house innovation and productivity improvements -- the former should attract new consumers to new P&G products, while the latter initiative would help sustain bottom-line growth in a weak sales environment. The company has already decided to sell its beleaguered pet-food division, which has been plagued by recall issues, for $2.9 billion in cash. This move should allow P&G to shift its focus toward higher-margin products.

The company is still bound to benefit from increasing middle-class consumer spending in China, as these newly successful families are likely to seek out better-quality consumer goods regardless of higher price points. P&G has also been expanding into additional international markets, particularly fast-growing developing markets, as rising populations and increasing per capita incomes provide a massive growth runway for consumer goods companies. P&G has also increased quarterly dividend payments to $0.6436 per share -- a 7% increase from its previous payout -- to boost shareholder confidence. This could be risky, as we've already pointed out, since P&G is paying out dividends at near-record levels relative to free cash flow.

P&G has ambitious plans to cut more than $10 billion in expenses by next year under initiatives launched two years ago -- the company plans to revamp its supply chain and manufacturing facilities in North America in an effort to improve productivity. P&G seems quite capable of delivering mid-single-digit revenue growth and might even expand its margins in emerging markets due to the perception of its brands as being superior and the resulting price inelasticity of its products. However, the company could also face adverse foreign currency impacts due to a strengthening U.S. dollar if the Federal Reserve raises interest rates sooner than expected.

Putting the pieces together
Today, Procter & Gamble has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.