P&G Enhances Its Returns, But Competition Is a Threat



Procter & Gamble returns substantial cash

Procter & Gamble (PG) stock has a rich history of enhancing shareholders’ returns through dividends and share repurchases. Procter & Gamble (PG) returned ~$22.0 billion and $16.0 billion to its shareholders in fiscal 2017 and fiscal 2016, respectively, in the form of dividends and share repurchases. 

In fiscal 2018, Procter & Gamble plans to return about $13.5 billion–$15.5 billion to shareholders in the form of share buybacks ($6.0 billion–$8.0 billion) and dividends ($7.5 billion). Procter & Gamble announced a 4.0% hike in its dividends in April, marking 62 consecutive years in which the company has increased its dividends.

Challenges persist

Procter & Gamble’s (PG) ability to generate strong cash flows and a significant decline in the tax rates have helped the company enhance shareholder value amid these challenges. However, the company’s continued low financial performance is taking a toll on its stock, which was down 15.7% YTD (year-to-date) on June 22.

Procter & Gamble is facing increased competition from local and private label products, which resulted in market share losses and lower organic sales. Amid heightened competition, the company was forced to invest in pricing to support volumes, which affected its organic sales growth and profit margins.

The organic sales of Procter & Gamble’s peers Kimberly-Clark (KMB) and Colgate-Palmolive (CL) remained low due to lower net price realization. Inflation in commodity prices and transportation costs are expected to weigh on the margins of these consumer product companies.

Procter & Gamble expects its organic sales to improve as it passes the pricing action taken in the shave care category last year. Cost and productivity savings measures are expected to support its margin expansion.

In the near term, private label products are gaining shelf space. As a result, higher manufacturing, packaging, and transportation costs are expected to remain a drag.

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