P&G: Streamlining and New Products

12/02/2014 8:00 am EST

Focus: STOCKS

Patrick McKeough

Editor, Successful Investor

This featured recommendation began operating in 1837 and is now one of the world's largest makers of household and personal care products, notes Pat McKeough, editor of TSI Network.

Procter & Gamble (PG) has seen sales slow in recent years, mainly due to competition from cheaper generic brands. In response, the company is eliminating less profitable household goods and cutting costs. It's also doing a good job of developing new products and finding new markets for existing ones.

These moves will give Procter more room to adjust its prices without hurting its profit margins. They'll also provide more cash for share buybacks and dividend hikes.

Procter sold 80% of its pet food business to Mars, Inc. and expects to complete the sale of the remaining 20% in 2015. It also recently agreed to sell its Duracell battery division to Berkshire Hathaway (BRK-A), the holding company controlled by Warren Buffet.

These sales are part of the company's new plan to sell around 100 of its less profitable brands. Following these moves, Procter will have around 80 brands that, combined, supply 90% of its sales and 95% of its profits. This tighter focus will cut the company's manufacturing and distribution costs.

The company will use some of these savings to develop innovative new products. For example, it has teamed up with appliance maker Whirlpool (WHR) to develop the Swash, a device that freshens and removes wrinkles from clothes in 15 minutes without ironing.

The company has also developed an industrial version of Tide detergent that uses cold water and a neutral pH formula that helps fabrics last longer. This should appeal to large customers like hotels and hospitals, because it would mean fewer linen replacements and lower power costs.

Meanwhile, the company is using more of its cash to buy back shares. It spent $6.0 billion on repurchases in both fiscal 2013 and 2014 and will probably spend the same amount this year.

Procter also recently raised its quarterly dividend by 7.0%. The new annual rate of $2.57 yields 3.1%. The company has paid dividends for 124 years and has increased its payout annually for the past 58 years.

The stock trades at 19.2 times the $4.38 a share that Procter will probably earn in fiscal 2015. That's a high multiple for a slow-growing consumer products company.

However, Procter's strong brands will help it continue to increase its sales in developing markets, which supply 40% of its overall revenue. That's helping it offset slowing sales in more established markets like Europe.

As well, more people in developing countries can now afford Procter's products, particularly razors and other items for personal grooming, which have higher profit margins than the company's soaps, detergents, and other goods. We recommend purchase.

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