Procter & Gamble: Consumer Turnaround?

12/23/2015 7:00 am EST

Focus: STOCKS

Bob Ciura

Contributing Editor, Wyatt Investment Research

Bob Ciura in Daily Profit looks at a leading consumer products firm and sees potential value from a long-term turnaround or the possibility of the firm splitting its operations into separate companies.

Procter & Gamble (PG) has endured a tough year. Shareholders have suffered a 14% loss this year, a disappointing performance for one of the world's biggest companies with more than 20 billion-dollar brands.

In response, the company embarked on a major turnaround strategy. It is aggressively selling off low-growth brands deemed non-critical to the company's future and it is reinvesting the proceeds in its most promising growth categories.

P&G also intends to buy back a great deal of its own stock going forward to try to support its stock price.

But some don't think P&G should stop there and some have argued for the company to consider splitting itself up to separate its beauty products, health care and grooming, and home and family care businesses.

A spin-off makes sense for P&G and could create value for shareholders, but here's why there may be better reasons to buy P&G stock.

Procter & Gamble has suffered a number of headwinds, including the rising US dollar and a product portfolio that has become bloated. The company's total sales fell 5% in fiscal 2015.

P&G is undergoing a major streamlining of its product portfolio. Investors likely recall its sale of the Duracell battery business to Warren Buffett's Berkshire Hathaway (BRK-B) for $3 billion and its huge $12 billion sale of 43 beauty brands to Coty (COTY) earlier this year.

Eventually, the company intends to sell as many as 100 brands. But this process will take a long time. P&G is a huge company with a market capitalization in excess of $200 billion. A company this massive does not turn around quickly. A spin-off could create value sooner.

Meanwhile, investors should focus more on whether the P&G turnaround succeeds. Restoring growth in its most important product categories is the bigger concern for investors over the long-term.

Another good reason to buy P&G stock is its generous dividend. P&G yields nearly 4%. Its payout has not been this high in the past five years. Moreover, it's a top dividend growth stock, with 59 consecutive years of annual dividend increases under its belt.

As a result, there are many valid reasons to invest in P&G stock, in addition to the spin-off rumors, namely, its portfolio restructuring, reliable cash flow, and high dividend.

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