Is Procter & Gamble’s Turnaround Plan Working?

Consumer staples giant Procter & Gamble (NYSE: PG) is in the middle of a massive turnaround. Due to slowing sales across several of its brands, the company made the decision to sell as many underperforming brands as possible. Investors may recall the huge deal struck earlier this year to sell 43 beauty brands to Coty (NYSE: COTY) for $12 billion.
P&G shares have declined 16% year-to-date, and the stock has underperformed the S&P 500 index by about 18 percentage points since the start of 2015.
In that context, P&G needs to demonstrate that its divestment plan is working. The recent quarterly results show some glimmers of hope that Procter & Gamble’s turnaround is working, but investors will need to have patience to stick with the stock.

Sign of Progress, But It’s Hard to See

P&G reported earnings in October for the first quarter of its new fiscal year. At first glance, the results looked very strong. Core constant-currency earnings per share rose 12% year-over-year.
Unfortunately, the report held a good deal of bad news as well. Sales fell 12% year-over-year to $16.5 billion. P&G continues to suffer from a brutal foreign exchange headwind. The strengthening U.S. dollar reduces the value of revenue generated overseas. Foreign exchange effects wiped out nine percentage points of P&G’s sales growth for the quarter. Still, even when excluding currency fluctuations, P&G’s organic revenue declined 1%.
The good news is that management expects organic sales to get back to growth this quarter and accelerate further in the back half of the fiscal year. This should take place as the company begins to lap its divestments.
And, the company’s earnings per share will likely continue to grow at a solid pace, thanks in large part to a massive share buyback authorization. With a balance sheet now flush with cash after its divestments, P&G plans to return $70 billion to shareholders in combined share buybacks and dividends over a four-year period through fiscal 2019.
Such a huge amount of share buybacks will meaningfully reduce the company’s share count. That means existing shares will capture a higher portion of the company’s profits.
Furthermore, with a leaner operating structure, margins should improve. Going forward, P&G will focus its efforts on 10 category-based business units where P&G has leading market positions and dominant brands. These are the highest-growing, most profitable units.
An example of this strategy at work is in P&G’s tissue business in Mexico. The company is shifting focus from discounted products geared toward the lower tier, to premium products aimed at the higher end. This change is expected to reduce sales by $75 million this year, but profits should increase by more than $30 million. Similar initiatives are taking place across the company’s remaining focus groups like fabric care.

The Verdict Isn’t in Just Yet

P&G has had a very tough year, and investors are anxious for any signs that the company’s turnaround plan is working. There are some signs that progress is being made, although with a company as large as P&G, such a major restructuring will take time, perhaps years, to materialize.
This uncertainty does not sit well with shareholders, which partly explains why the stock has had such a bad year. But over the long term, P&G is still a leader in the industry with a huge portfolio of top brands.
It will likely take several more quarters for P&G to reverse its declines in revenue, so investors may not see the stock price appreciate much heading into 2016. But the good news is that P&G’s profits should continue to grow. This will allow the company to raise its dividend each year, and it will still be a top dividend stock, as it offers a nearly 4% yield.
Plus, P&G is a Dividend Aristocrat, having raised its payout for the past 59 years in a row. With a track record like that, income investors should still feel good about owning P&G.

Dividends for Every Month of the Year 

If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.

Click here to see the full details of this company in my Dividend Calendar…