Consumer-goods giant Procter & Gamble
On Dec. 14, the company hosted a presentation to make the case to investors that P&G shares deserve equally broad penetration in the nation's stock portfolios.
P&G's value as a low-risk core holding should be obvious. The 169-year-old company is one of the steadier components of the stalwart Dow Jones Industrial Average, and its portfolio of brands epitomizes the concept of consumer staples. But management's message is that investors can expect accelerating sales and expanding margins from the purveyor of such timeless products as Tide laundry detergent, Crest toothpaste, and Bounty paper towels. What's the basis for the surprising promise that well-established brands will deliver strong earnings growth for shareholders?
Product innovation is one of the pillars that would support continuing earnings growth. In recent years, P&G has shown an impressive ability to establish new product categories and develop line extensions for existing brands. Products such as Swiffer dust cloths and Tide cold-water formula have generated excitement among consumers who are accustomed to finding new innovations in luxury products such as electronic, but less inclined to expect new, value-added developments among products located in the consumer-staples aisle. P&G's innovations have played an important role in the company's ability to grow sales volume and maintain pricing power in a competitive marketplace.
Productivity gains provide another important source of support to P&G's plans to increase earnings. The company achieved operating margins of 19% last year on sales of $68 billion and expects to expand operating margins to 24% over the next several years -- an improvement that would occur, in part, by continuing to realize operational synergies with Gillette, which P&G acquired last year. The company is in the process of consolidating the number of distribution centers in its global operations. In addition, its growing heft is giving it an increasing advantage in sourcing input materials at a lower cost.
P&G's management shared a number of examples of how scale has provided important benefits in the past, and it pointed out opportunities to use scale to increase earnings in the future. Few consumer-goods companies could match P&G's commitment to research and development. The company spent $200 million on consumer research in 2006, and approximately 4 million consumers participated in research tests. The proprietary knowledge acquired from such efforts, and later refined by market experience in dozens of product categories and markets, has provided P&G with an important competitive edge over rivals.
The $8 billion that P&G spent on advertising in 2006 was twice as much as any other company in any industry spent, and P&G has been able to use that status to negotiate favorable rates in its media buying. P&G expects that focusing on overhead costs while increasing sales will likely add 2 percentage points of operating-margin improvement during the course of the decade.
P&G's management will increasingly seek to extend the company's innovation and productivity leadership to developing markets that promise attractive opportunities for overall market growth, as well as growth in P&G's market share. The company expects to generate 30% of its sales from developing markets in 2010, compared with just 20% in 2000. P&G will also seek to shift its focus to products in beauty, health, and home-care categories, which show stronger sales and profit-margin potential and place less emphasis on household products.
At a recent share price of $64, P&G's multiple of 24 times earnings is lower than the P/E multiples of rivals Colgate-Palmolive
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