Don’t Hold Your Breath on a P&G Turnaround

Consumer staples giant Procter & Gamble (NYSE: PG), the company behind a number of household brands including Tide, Crest and Gillette, posted mixed earnings results on Thursday.Tide-logo
This year hasn’t been kind to P&G. The stock has tumbled 15% year-to-date. That includes a 4% drop after it reported quarterly results, which beat analyst expectations on profits, but missed on revenue.
For many years, P&G has been known as a rock-solid, slow-and-steady company, highly regarded by investors for its steady dividends and reliable profits. But the company is suffering a series of stiff headwinds this year, including the rising U.S. dollar, and slowing sales of some of its key brands.
Here’s why P&G is having such a hard time, and why growth investors may want to look elsewhere.

A Year to Forget

P&G’s fiscal 2015 is now in the books, and the results were not pretty. Revenue declined 5% to $76.3 billion, and diluted GAAP earnings per share from continuing operations fell 21%, although to be fair, much of the damage was due to the strong U.S. dollar.
Currency wiped out six full percentage points from P&G’s revenue growth last year. Excluding this, its organic revenue would have actually increased 1%. However, that is still an unimpressive year for one of the world’s strongest companies.
P&G sells its products in more than 180 countries around the globe, and has some 23 billion-dollar brands that each rakes in at least $1 billion in annual sales. But some of these brands have showed weakness this year, outside of just foreign exchange.
In fiscal 2015, volumes fell 4% in the beauty, hair and personal care segment, 3% in grooming, and 1% in health care and baby, feminine and family care. Such steep declines in volumes cannot be written off by currency; this represents a much more concerning decline in underlying demand for P&G’s products.
This is why P&G has pursued an aggressive round of divestments, to rid itself of low-growth businesses and reinvest in higher-growth areas.

P&G Turnaround Will Take Time

Investors may recall that recently, P&G has made a number of deals to streamline its brand portfolio. In 2014, P&G sold the Duracell brand to Berkshire Hathaway (NYSE: BRK-B) for $4.7 billion.
Earlier this year, P&G divested 43 beauty brands, amounting to $12.5 billion, to Coty (NYSE: COTY), which makes products like Marc Jacobs and Calvin Klein fragrances. The businesses sold to Coty included P&G’s fragrance lines with brands like Dolce & Gabbana, Gucci, and Hugo Boss. Also included in the sale is cosmetics, including the Cover Girl and Max Factor brands, and the Wella hair-products business.
Before all is said and done, P&G management has stated its intention to unload as many as 100 brands that were collectively declining at a low-single-digit rate for the last three years.
The point of these divestitures was to unload businesses that were profitable, but weren’t growing much. Now, P&G can pursue other actions to create greater value for shareholders, such as investing in higher-growth businesses or buying back a large amount of stock.
Still, this transformation will take time. P&G is a huge company, with a $210 billion market capitalization. Turning around a ship this large does not happen overnight. It may take several more months for investors to see the benefits, but the dividends will continue to roll in. That being said, investors seeking more immediate gains should look elsewhere.

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