Procter & Gamble (PG -0.06%) is more than 177 years young today. However, you wouldn't know that by the company's cutting edge products or portfolio of leading brands, which include 23 brands that each generates annual sales north of $1 billion. Over time, even the most beloved companies can lose their competitive edge and slowly begin to see their market share eroded by newer, more nimble, businesses. However, this isn't the case with Procter & Gamble.
In fact, the consumer goods conglomerate looks stronger than ever today as it sheds under performing brands, returns billions to shareholders through dividends and buybacks, and enforces strict cost-cutting measures. Procter & Gamble's secret to creating shareholder value for more than a century can be summed up with a single word: Innovation.
When it comes to innovating, Procter & Gamble trumps the competition in a big way. The word innovation is mentioned 59 times in the company's fiscal 2014 annual report, which is more than double that of its closest competitor. However, that's just semantics. The real proof of Procter & Gamble's innovative prowess can be seen in its ever-evolving brand innovations. P&G topped the New Product Pacesetters 2013 list, for example, after delivering seven of the top 10 most innovative products outside of food including its ZzzQuil medicine, Tide PODS, Downy Infusions, and Secret Outlast.
These product innovations fuel P&G's profits and give the company pricing power over rival brands. Tide PODS, for example, are priced at a 20% premium to P&G's traditional Tide products and the PODS now make up more than 7% of the overall laundry category.
Over the years, as many as 155 of the consumer goods giant's products have made the top 25 Pacesetters list, which is more than P&G's six largest competitors combined. Some of the company's more recent game changing innovations include Bounty with Dawn, Pampers Premium Care Pants, and Tide HE Turbo Clean. However, make no mistake ... It takes billions of dollars and high tech labs to churn out this level of innovation.
Last year, Procter & Gamble spent $2 billion on research and development alone. That compares to $630 million in R&D spending for rival Kimberly-Clark (KMB 1.43%) and around $1 billion in R&D spending for Unilever (UL 0.37%). Meanwhile, Procter & Gamble opened the largest private research lab in Singapore last year with the launch of its Singapore innovation center. The new facilities will house nearly 500 researchers, engineers, and PhD scientists. Procter & Gamble has more than 27 research facilities in operation around the world today. On top of this, the company discovers and retains top talent such as its more than 1,000 employees with Ph.D.'s through what it calls "innovation-centered recruiting."
This commitment to innovation has led P&G to capture about 60% share of the U.S. laundry market and 70% share of blades and razors sales in the U.S. today. It has also helped the company create product categories that didn't previously exist like disposable diapers and at-home teeth whitening strips. Therefore, innovation is not only at the heart of Procter & Gamble's business, but it is also P&G's secret weapon for staying one step ahead of the competition.
By focusing on its most profitable brands and accelerating its product innovations, Procter & Gamble should have no problem dominating the consumer goods space for many more decades to come. In the meantime, shares of P&G look attractively priced trading just 3% above the stock's 52-week low. Moreover, the stock currently trades at just 23 times earnings or below the industry average price-to-earnings multiple of 26. As a result, I believe investors can buy and hold this stock for many years to come.