Procter & Gamble (PG) isn’t a stock I would normally own, but you can’t deny the company is an excellent long-term investment. And I mean long-term investment. You could hold this stock for generations and earn perhaps a total return (stock growth + dividend) of between 5% and 10% per year. In fact, during the last decade PG’s profits have grown 5% a year and the stock’s grown 5% per year. The dividend is currently 3%. PG is safe. People are gonna buy Tide. This is a great buy-and-hold stock for retirement accounts. That is if you buy it at the right price.
But for the last two years Procter & Gamble has been high. The stock broke past $70 in January of 2013 right at a time when conservative stocks were undervalued. At the time of the breakout, PG was selling for 17 times what it would go on to make in 2013, and after that the stock has pretty much had a P/E in the 20s, which I think is a little too high.
What’s worse is PG just had an awful earnings report, which sent its shares from $92 to $84. That’s a big drop for a stock that’s grown 5% per year. The reason was profits came in way under expectations as “unprecedented currency devaluations” took profit growth from +6% to -12%. Ouch.
PG has been successfully reinvigorating itself the past year, by selling off non-growth divisions. Last qtr I wrote Procter & Gamble sold Duracell to Berkshire Hathaway for $3 billion. I think the company is on the right track, but the strong dollar is killing profits. PG management said during the qtr nearly every currency in the world devalued versus the U.S. dollar. And from the looks of things that trend is bound to continue.
One Year Chart
So PG dropped 10% so it mus be cheap, right? Well it’s not. It still sells for 21 times earnings. I think the P/E should be 17. What’s really bad in this one year chart is 2015’s profits are expected to be less than 2010’s. The company isn’t growing profits anymore, and stock growth follows profit growth. Not a good sign.
Last week PG’s profit estimates got slashed across the board. 2015’s went from $4.38 to $4.02. Next quarter’s estimate fell from 5% to -8%.
Fair Value
I feel 17 times earnings is very fair for this stock considering the currency problem — which isn’t going away soon. My 2015 Fair Value is $68. With the stock at $84 it’s high.
Sharek’s Take
Procter & Gamble remains an excellent investment for retirement accounts that are in it for the long run — and I mean the long run as I feel this stock could be selling at this price two years from now. If you’re looking to invest I suggest you wait, if you own the stock and don’t have the patience to sit on it for years (generations?) then you may want to sell it and look to buy it back later. Maybe next year profit growth will be better if the dollar settles down.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
