Proctor & Gamble Grows But Fails To Impress
Procter & Gamble (NYSE:PG) is another example in a growing list of a phenomenon I suspected may occur this quarter. While the company issued a good FQ2/calendar Q4 earnings report the results weren’t that impressive relative to the expectations and the guidance is shaky. Not shaky in the sense that growth is going away, just shaky in the sense that near-term trends are less clear than long-term trends. The end result is a pullback in share prices that has both the valuation and dividend looking more attractive but still not what I would call a bargain among consumer staples. At 23X earnings and 2.25% yield you can get cheaper stocks with higher yield and better dividend growth.
"We very much like our long-term prospects, while the near-term will continue to be challenging and more difficult to predict," warned P&G execs.
Proctor & Gamble Beat Consensus And Raises Guidance
Proctor & Gamble had a good quarter and one that was better than the consensus estimate but that was expected. The consensus estimates for most stocks are trailing the underlying rebound and has the market set up to beat so the expectations are high. So, Proctor & Gamble’s 8.3% increase in YOY revenue is fantastic but it only beat the consensus by 250 basis points and failed to spark much excitement. At least among the bulls, that is.
On an organic basis, revenue increased by 8.0% versus the 6.4% expected by the analysts. That was driven by a 5% increase in shipments compounded by a 1% increase in pricing and a 2% improvement in the mix. The 1% increase in pricing is worth noting because this won’t be the last time we see this. Shipping costs are on the rise due to an undersupply of drivers and capacity. Until that situation gets sorted out it will have a negative impact on producer and consumer prices as well. Looking at the mix, the product mix helped boost revenue due increased demand for housewares and appliances.
Moving down the report, the increase in demand and shift in mix helped drive an improvement in margins as well. Both gross and operating margin improved over the last year and beat the consensus estimate by at least 100 basis points. This led to solid gains on the bottom line although the GAAP eps fell short of consensus by $0.02. On an adjusted basis, however, earnings beat by $0.13 and are up 15% from last year. In terms of guidance, Proctor & Gamble raised its guidance but once again it was expected. The company raised revenue growth to a range of 5% to 6% and EPS to 8% to 10% which brackets the consensus estimate nicely.
Is Proctor & Gamble’s Dividend Safe?
Weakness in the shares of PG stock is a worry for investors but is more to do with outrageous market expectations that were unfulfilled than anything else. The company grew its revenue by 8.3% and leveraged that growth to a 15% increase in earnings that is expected to stick. The dividend is safe enough and more. With a 64 year history of dividend increases and a 50% payout ratio investors can expect future dividend increases as well.
The company is planning on paying out $8 billion in dividends this year along with up to $10 billion in stock repurchases. This is up from the $7 to $9 billion in repurchases previously announced which means the next dividend increase could be large as well. Not only will the float be lower but the available cash flow is growing so the least investors should expect is another 6% increase to match the one made in 2020.
The Technical Outlook: Proctor & Gamble Pulls Back To Support
Shares of Proctor & Gamble staged a pretty nice rebound from the March low it is not a surprise to see them pulling back now. The surprise is that price action was able to break below the recent trading range to set a new low but it looks like a new support level is already forming. The new level is near $130 and compounded by oversold conditions and diverging momentum. If price action breaks below this level a move to $128 and $124 is possible.
