A Household Name on the Mend

03/14/2013 10:15 am EST


Charles Carlson

Editor, DRIP Investor

This stalwart known for Pampers, Tide, Duracell, and a bunch of brands you use every day is ready for a big turnaround, says Charles Carlson of DRIP Investor.

To say Procter & Gamble (PG) has been a lazy stock in recent years would be an understatement. These shares were up less than 2% in 2012, and less than 4% in 2011. Flat earnings and revenues have not helped.

However, the company seems to be in the midst of a turnaround. Per-share profits have handily outperformed consensus estimates in the last two quarters, and earnings estimates for fiscal 2013, ending in June, have bumped up nicely in the last 30 days.

The stock is responding to the improved earnings outlook, recently moving to a fresh 52-week high.

Procter & Gamble still has plenty of work ahead. Its consumer markets continue to be quite competitive, and parts of the globe (the company gets around two-thirds of its revenue from overseas) still have fragile economies.

However, for investors who want a blue chip with an above-average yield, a stellar record of growing its dividend (56 consecutive years and counting), and reasonable upside potential, these shares should fit the bill.

Procter & Gamble’s product stable includes such popular brands as Pampers, Tide, Pantene, Bounty, Dawn, Charmin, Crest, Oral-B, Duracell, Olay, Gillette, Braun, Febreze, and Vicks. Fabric care and home care (33% of sales) and beauty (24% of sales) represent the two largest segments.

The company is coming off a solid December quarter. Core earnings per share increased 12% to $1.22 per share, beating the consensus estimate by 11 cents. Organic sales grew 3%, with all business segments increasing organic sales by 2% or more versus the prior year. The company held or grew market share in businesses representing nearly 50% of sales in the quarter.

Procter & Gamble boosted its per-share earnings guidance for the fiscal year ending in June to $3.97 to $4.07, and bumped up its organic sales growth guidance to a range of 3% to 4% from a previous range of 2% to 4%. Procter & Gamble also boosted is outlook for share repurchases to $5 to $6 billion, up from prior range of $4 to $6 billion. The results sparked a nice rally in the shares.

Another catalyst for the stock has been the presence of activist investor William Ackman, who is providing yet another “motivating” force for P&G management. The company’s improved outlook should spark another dividend increase over the next three to six months. I would expect a bump of at least 7% in the payout. The stock’s current yield is nearly 3%.

Procter & Gamble is not a cheap stock. The shares trade at 19 times the fiscal 2013 consensus earnings estimate of $4.07 per share. Thus, the stock is vulnerable to selling pressures should the rebound stall.

However, the combination of dividend yield and appreciation potential has been a strong lure for investors of late, and Procter & Gamble should find its stock in demand if it can continue to deliver on its turnaround.

Please note that the company offers a very user-friendly direct-purchase plan in which any investor may buy the first share and every share of stock directly from the company.

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