Procter & Gamble (PG 0.64%) is a favored stock among investors for consistent growth and income. The company has been around for ages, selling top brands in grocery store aisles that people purchase every day. Among the many premium brands it manages are names like Gillette, Tide, Charmin, Dawn, Oral-B, Pampers, Vicks, Swiffer, Crest, and many others.
The stock price more than doubled (when including dividend reinvestment) over the last five years, significantly beating the return of the S&P 500 index. It's also notable that P&G shares outperformed industry peers in the Consumer Staples Select Sector SPDR Fundover the same period.
However, the stock underperformed over the last year, up 5.5% to the index's 13% total return. P&G reported weak sales volumes due to inflationary headwinds. But price increases allowed the company to deliver profitable growth in a challenging economy. Solid growth on the bottom line is fueling growing dividend payments to shareholders.
Is the stock worth buying, or should investors look elsewhere for better returns? Here's everything you need to know to decide if this consumer staples stock is right for your investment goals.
Recent performance
What you get with P&G is consistency. It says a lot about the quality of the business that despite disruptions from inflation and supply chain headwinds over the last few years, the company's net sales and core earnings per share (EPS) increased each year between fiscal 2018 and fiscal 2022 (which ends in June). Net sales grew from $67.7 billion to over $80 billion, while core EPS grew from $4.22 to $5.81 through the end of fiscal 2022.
P&G's adjusted sales were up 7% year over year in the most recent quarter, consistent with the growth trend over the last four years. This was driven by price increases, as volume-unit sales were down 3%. The company saw mixed results across the world with the U.S. and China experiencing improving volume sales, while Europe still wrestles with inflationary headwinds that hurt demand.
P&G's competitive position
P&G is well insulated from competing household products due to its brand power and relationships with retailers worldwide. But the inflationary environment has highlighted some vulnerabilities to the business. The decline in sales volume shows that some consumers are not going to pay premium prices despite P&G's efforts to separate its products from the competition based on superior product performance.
Overall, P&G's strategy works well. In addition to its brand portfolio, P&G also has a world-class supply chain. Management is currently executing its Supply Chain 3.0 strategy to create more efficiency. This is why earnings per share grow faster than the top line. Despite higher costs, core EPS grew 13% year over year (excluding foreign currency changes) in the last quarter, which is quite impressive for a company of this size.
Management is targeting $1.5 billion in cost savings over the next few years in addition to savings in marketing expenses, so investors should expect more growth in earnings. Further growth on the bottom line will allow for dividend increases, which is why investors should consider holding the stock for the long term.
Should you buy, sell, or hold?
Once the global economy is fully recovered, P&G could grow slightly faster than its recent trend. The stock's premium valuation implies profitable growth over the next several years.
The quality and consistency of P&G's business mean the stock is rarely cheap. The shares currently trade at a price-to-earnings (P/E) ratio of 26, compared to the S&P 500 average P/E of 25.This is considered a fair valuation for top consumer staples stocks.
Over the last 30 years, the only time the stock was a true bargain was during the 2008 market crash.
PG PE Ratio data by YCharts.
The decision to buy the stock comes down to each investor's return expectations. P&G is consistent, but the stock has underperformed the S&P 500 index over the last 10 years.
P&G should continue growing sales at rates consistent with recent trends. Cost savings could maintain earnings growth of around 10% per year. At the current valuation, investors can expect the stock to grow in value in line with future earnings growth.
Total Return Level data by YCharts.
Considering the company's past performance, I wouldn't buy the stock expecting market-beating returns.
However, P&G is a great stock to buy if you're looking for consistent and growing income. The company recently raised the quarterly dividend by 3%, marking 67 consecutive years of dividend increases -- a remarkable record.
P&G's dividend yield is also higher than other stocks. Its current yield of 2.5% is more attractive than the S&P 500 yield of 1.5%.
Buy for the dividend
Last year's market sell-off created some incredible buying opportunities in growth stocks, so I wouldn't buy P&G if you're expecting big returns. But if you're looking for a stock that is easy to understand, consistent, and pays a generous dividend, you won't find a better option than Procter & Gamble.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
