Procter & Gamble Trims Down to Ramp Up

Procter & Gamble Co (PG) is a giant of the consumer goods sector but has shrunk in size over the last several years. In this article, we put this reduction into perspective by examining some of Procter & Gamble’s business and strategy.  

Core Business

Since incorporating in 1890, Procter & Gamble has grown to become one of the world’s most distinctive providers of consumer goods. With a market capitalization of US$212.67 billion as of Oct. 2, 2018, Procter & Gamble operates in approximately 70 countries and owns a portfolio of well-known brands such as Head & Shoulders, Olay, Pantene, Gilette, Crest, Dawn, Tide and, Febreeze. Of the 48 brands it owns today, they generate $66.8 billion in sales per year, according to the company’s annual report in 2018. [1]

Sales and Net Earnings

In its June 2018 annual report, Procter & Gamble reported a 3% surge in sales, although organic sales growth was just 1% and volume growth was 2%. P&G’s core earnings per share were up 8% to $4.22 per share. However, that is not attributed to net income growth, instead mainly by share buybacks. [2]

The 2018 U.S. Tax Cuts and Jobs Act affected net earnings from operations, which decreased by 3%, or $333 million, in 2018. [3]

Strategic Direction

Procter & Gamble’s shareholders can take solace in the fact that the company’s management has continued to make progress on two of its major strategic objectives. One is rolling out a significant productivity and cost savings plan. Two is carrying out the divestiture of nonessential brands.

Since 2012, Procter & Gamble has been undertaking a productivity and cost savings plan in these specific areas: research and development, supply chain, and marketing and overheads. Cost reductions are facilitated by things like streamlining management decision-making and manufacturing, to support Procter & Gamble’s overall growth goals. [4]

In its 2018 annual report, the company estimates that this cost savings plan has resulted in $3.3 billion in annual before-tax gross savings. [5]

In 2017, Procter & Gamble stated it would add additional years to this program, with further hopes to reduce costs in supply chain, certain marketing activities and, overhead expenses. [6]

In addition to these efforts, Procter & Gamble opted to reduce the size of its brand portfolio, driven largely by investor pressure. In August 2014, the company embarked on a plan to divest or consolidate roughly 100 brands in order to focus attention on its most profitable assets. To this end, Procter & Gamble completed a $12.5 billion deal in July 2015 with the French beauty products manufacturer Coty Inc (COTY), resulting in the divestment of 43 of its brands. 

Similarly, the company announced in November 2014 that it intends to sell its batteries business to Warren Buffet’s holding company, Berkshire Hathaway Inc (BRK.A), in a deal worth roughly $2.9 billion.

The company intends to make enhancements to its portfolio as well. In 2018, Procter & Gamble entered into an agreement to acquire Merck KGaA, an over-the-counter (OTC) healthcare business, for approximately $3.9 billion. Merck KGaA mainly sells healthcare products to consumers in Europe, Latin America and, Asia. The deal should close in 2019. [7]

Also in 2018, Procter & Gamble decided to end its PGT Healthcare partnership, a venture between it and Teva Pharmaceutical Industries, Ltd (TEVA), which lives in the OTC consumer healthcare business space. Completed in July 2018, Procter & Gamble expects to gain approximately $285 million from the sale. [8]

Distinguishing Features

Although Procter & Gamble has seen its share price decline as recent as July 2018, the company’s long-term investors are unlikely to be overly concerned. For such investors, Procter & Gamble’s sterling record of uninterrupted dividend payments provides a degree of insulation against short and medium-term declines in share prices. [9]

In its 2018 Annual Report, Procter & Gamble says it has returned more than $14 billion of value to shareholders. The company repurchased $7 billion of stock and paid $7.3 billion in dividends. It increased its dividend by 4%, marking the 62nd consecutive annual increase and the 128th consecutive year Procter & Gamble has paid a dividend - every year since its incorporation in 1890. [10]

The Bottom Line

Looking over the above considerations, it is hardly a surprise that Procter & Gamble continues to be a popular asset in investor portfolios. Over 125 years, the company has proven that it can successfully grow its business through a variety of economic conditions—no small feat given its immense size. Although there is no guarantee that its future will be as successful as its past, Procter & Gamble’s proven track record of creating value for shareholders certainly provides a basis for confidence.

1- 8, 10. 2018 Annual Report

9 Share price decline

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