Procter & Gamble: Less Is More?

09/10/2014 8:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Our latest featured stock is planning to test the “less-is-more” theory of business with its plans to sell roughly half of its brands in the next two years, explains dividend expert Chuck Carlson, editor of DRIP Investor.

Procter & Gamble (PG), the consumer-products giant with such household names as Tide and Pampers, is considering selling up to 100 brands whose sales have been on the decline.

Procter & Gamble’s top 80 brands had sales of around $84 billion in 2013; the remaining 100 or so brands had sales of less than $3 billion. The announcement was received well on Wall Street, as PG shares popped more than 3% on the news.

As a Procter & Gamble shareholder, I’m in favor of the move. Shedding brands should improve the cost structure while freeing resources to be focused on higher-growth projects.

Admittedly, rekindling growth at such a behemoth as Procter & Gamble is no easy task, and it certainly will not happen overnight. Still, the streamlining seems like a good start.

To be sure, Wall Street, especially the activist investors that have been circling PG in recent years, will eventually need to see tangible evidence of growth.

But this announcement has probably bought the company a couple of quarters of goodwill. Procter & Gamble said it expects organic sales growth in the low- to mid-single digits in fiscal 2015, with core earnings growth rising mid-single digits.

The stock currently trades at more than 18 times the fiscal 2015 consensus earnings estimate of $4.46 per share, so there doesn’t appear to be much margin for disappointing investors. On the plus side, the stock’s hefty yield of 3.1% should provide some support to the stock.

I have been a long-time investor in Procter & Gamble, holding the stock for more than 20 years.

While it has rarely been at the top of the leader board, the combination of yield, good dividend growth—the firm has boosted its dividend annually for the last 58 years—and decent capital gains has provided a nice total-return package.

These shares have defensive characteristics that tend to provide some ballast to a portfolio. I plan on maintaining positions in the stock and recommend you do the same.

Procter & Gamble offers a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $250 with no enrollment fee.

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