Procter & Gamble Stock: What’s behind Its Solid Return?

Amid growing pessimism, consumer stocks continue to outpace broader markets with their solid returns. So far, Procter & Gamble (PG) stock has generated a stellar return this year. The stock has outperformed the S&P 500.

Procter & Gamble (PG) shares have risen 29.7% on a YTD (year-to-date) basis as of Wednesday. The company is boosting shareholders’ return through share buybacks and a healthy dividend yield of 2.5%. The S&P 500 rose 16.7% during the same period.

The company’s strong organic sales supported the stock’s stellar return in the past several quarters. Procter & Gamble beat analysts’ EPS estimates in the past 17 quarters. Besides the company’s strong financial performance, investors are flocking to defensive stocks. The markets don’t seem friendly for most of the sectors.

Procter & Gamble stock also outperformed most of its peers in the household and personal care segment. Kimberly-Clark (KMB) and Colgate-Palmolive (CL) shares have risen 24.5% and 22.0% YTD. Meanwhile, Church & Dwight (CHD) stock has risen 20% YTD.

Procter & Gamble stock benefits from its strong organic sales. On average, the company’s organic sales have increased 5% in the last four quarters. During the recently concluded fourth quarter, the company’s organic sales rose 7%—the best in a decade.

Balanced growth in pricing and volumes are supporting the company’s organic sales. The focus on premium innovation supports the company’s sales. Besides strong sales, Procter & Gamble also had impressive profit margins. The company’s gross margin and operating margin rose by 120 basis points and 130 basis points, respectively. Improved organic sales and substantial productivity savings drove the company’s margins higher.

Procter & Gamble’s peers have also posted strong organic sales over the past several quarters due to higher pricing. Kimberly-Clark’s organic sales increased by 5% during the last reported quarter. Management stated that higher pricing and a favorable product mix drove the company’s organic sales. Kimberly-Clark’s margins also improved due to higher pricing and cost-savings.

Colgate-Palmolive’s organic sales rose 4% due to increased pricing and volumes. The company’s gross margin also expanded, which reflected higher pricing. Church & Dwight posted 4.9% growth in organic sales. The company’s organic sales have increased more than 4% in the past five quarters. Church & Dwight’s innovation, product mix, and pricing continue to support its organic sales.

We expect Procter & Gamble stock to continue to benefit from strength in the base business. We expect the company’s organic sales to continue to grow due to premium innovation and a gradual increase in pricing. Management remains upbeat and expects organic sales to increase 3%–4% in fiscal 2020.

The company’s margins will likely benefit from higher pricing and productivity savings. Moderating input and logistics costs will likely cushion the margins.

Procter & Gamble’s core earnings will likely gain from higher organic sales and margin expansion. Moreover, share repurchases could drive the company’s earnings.

The sector’s defensive nature and improved financials could support Procter & Gamble stock in upcoming quarters.