Why I’ve downgraded this Dow Jones megastar
25th January 2023 08:36
by Rodney Hobson from interactive investor
It pays a decent dividend but this colossal multinational has put off overseas investing expert Rodney Hobson. Here’s why he’s cut his rating on the shares.
Tougher times for consumers has translated into a squeeze on Procter & Gamble Co (NYSE:PG). The strength of the US dollar has not helped, either. Increasing profits in the near term is going to be difficult.
The consumer goods firm, whose brands include Aerial, Fairy, Gillette and Lenor, reported that net sales fell 1% to $20.8 billion in the final three months of 2022, the second quarter of its financial year. Beauty, grooming, baby, feminine and family care all saw falls in sales, while healthcare did best, although even here growth was only 2%.
- Invest with ii: Buy US Stocks & Shares | US Earnings Season | Interactive investor Offers
Admittedly, the figures are not quite as bad as they seem. Just over half of all revenue comes from outside the United States, and the strength of the dollar cut the value of sales made in other currencies, otherwise there would have been 5% growth. The company is now slightly more optimistic about keeping up that level of growth for its full financial year to the end of June.
More worrying is that earnings per share (EPS) slipped from $1.66 in the same quarter of 2021 to $1.59. Chairman John Moeller expects EPS to grow over for the full year, but one might be more confident if he refrained from comments such as this: “We remain committed to our integrated strategies of a focused product portfolio, superiority, productivity, constructive disruption and an agile and accountable organization structure.”
Does that mindless jargon really add anything to the sum of human knowledge? Or increase confidence that he has a grip on the company’s operations? Despite the bullish tone, P&G’s sales comparisons have actually slipped back since the previous quarter.
The company certainly needs to concentrate meaningfully on higher input costs and increased distribution charges. While the range of strong brand names such as Tide washing powder, Oral-B toothbrushes, Pentene shampoo and Pampers nappies has allowed P&G to pass increased costs on to consumers in the form of higher prices, there is a worrying trend for hard-pressed consumer to switch to cheaper own-brand alternatives in supermarkets.
- US earnings season - the big dates to watch for
- ii view: P&G exceeds expectations in tough quarter
- 2023 Investment Outlook: stock tips, forecasts, predictions and tax changes
This could be the point at which P&G discovers that its pricing power is not as strong as it thought. It has raised prices by 5% but seen sales drop 6% in volume terms. If consumers find that cheaper alternatives are just as good, or so close that they cannot tell the difference, then those customers are potentially lost forever.
Gross profit margins did pick up in the latest period but at 47.4% are still lower than they were a year earlier. To restore margins, P&G will need to raise selling prices further while hoping that the rise in input prices is abating.
Source: interactive investor. Past performance is not a guide to future performance.
The shares have bounced around quite a bit over the past 12 months, dropping from over $160 to a low of $123 in October, and are now somewhere in the middle of that range at $142, where the price/earnings ratio is a quite demanding 25. P&G has paid a dividend every year since it started up 130 years ago and the yield is a reasonable, if not overwhelming, 2.6%.
Hobson’s choice: The strength of P&G’s brands has prompted me to tip the shares in the past, and anyone following that advice has enjoyed a decent dividend to compensate for the effect that ups and downs in the share price may have had on their nerves.
Figures from the past two quarters have made me a lot more cautious. If you are already in, you should hold on and await the better times that will no doubt come eventually, but anyone thinking of buying should wait to see if a better opportunity arises. It is quite possible the shares will drop back to $123 again while investors wait for improved news.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Disclosure
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.