For income investors, one of this week’s most highly anticipated events could be found in the latest earnings release from Dow component Procter & Gamble (NYSE: PG). For the most recent reporting period, the consumer staples company recorded revenue gains of 9% and management increased its guidance for sales and growth in core earnings for fiscal year 2021.
Overall, we believe that this sets the stage for continued moves higher in PG share prices and the stock’s 2.23% dividend yield is now looking very attractive in this new macroeconomic environment that is likely to be characterized by low interest rates for an extended period of time.
Source: USA Today
For the fiscal first-quarter period, Procter & Gamble generated earnings of $1.63 per share (or $4.28 billion in total net income). This performance marked significant gains when compared to the $3.59 billion (or $1.36 per share) that was reported in the same period last year, and these figures beat market EPS expectations (of $1.42) by a wide margin.
Source: Author via Tradingview
During the period, Procter & Gamble recorded $19.32 billion in net sales and this figure beat analyst expectations by nearly $1 billion. If we exclude factors like the impact of changes in foreign exchange valuations, divestitures, and acquisitions, we still see organic revenue gains of 9% and this is a factor that further solidifies the strength that Procter & Gamble has shown this earnings season.
For Procter & Gamble, the North America consumer region represents the company’s largest consumer market and this region turned out to be the company’s most critical driver of sales growth during the period. Procter’s well known line of cleaning products has experienced a significant increase in demand since the beginning of the coronavirus pandemic and this buying activity is now likely to benefit investors with long exposure to the stock.
Source: Procter & Gamble
During the period, Procter & Gamble recorded organic sales growth in each of its central business segments. Of course, the most impressive results came from the company’s home care segment (with products including famous brand names like Comet and Tide) which saw gains of 30% in organic sales.
Procter & Gamble’s health care segment (with products like Oral-B, Pepto-Bismol and Crest toothpaste) also generated elevated gains as consumer demand seems to indicate a much greater focus on protective wellness. But some analysts have questioned the possibility that these trends might be unsustainable if a coronavirus vaccine leads to shifts in consumer behaviors.
However, strength was also visible in the company’s beauty segment, where gains of 7% were seen in organic sales growth for the quarter. In the beauty segment, new hand sanitizer and hand soap products helped add to the tally for personal care and skin care items. Procter & Gamble’s grooming business also saw organic sales growth (at 6%).
But the company’s shaving items (including products like Venus and Gillette) saw organic sales growth flatten during the period. Sales for women’s shaving products did see minimal gains during the quarter but reduced sales in male shaving products offset those gains for the period. Apparently, the COVID-19 pandemic has given many men an excuse to grow a new beard.
Procter & Gamble’s family and baby care segment (with products like Charmin toilet paper, Bounty paper products, and Pampers) was one of the company’s weaker areas (generating 4% organic sales growth for the period).
For the full fiscal-year period in 2021, Procter & Gamble expects to see a sales growth figure of between 3-4% and this is a substantial increase from the company’s previous forecast (which ranged from 1-3%. Expectations for full-year organic revenues have also been revised higher (at 4-5%) and these revisions mark a stable increase from the prior estimates (calling for 2-4%).
Source: Procter & Gamble
Procter & Gamble now expects core earnings per share to come in higher they than did previously (with growth rates of 5-8%). Prior expectations were calling for growth rates of 3-7%. Freight costs and the negative impact of changes in forex rates is now expected to reduce earnings by a total of $375 million.
In further describing some of these trends, Procter & Gamble CEO David Taylor explained:
We delivered another strong quarter of organic sales growth, core earnings per share and cash returned to shareowners, enabling us to increase our outlook for fiscal year results. Our near-term priorities continue to be employee health and safety, maximizing availability of P&G products for consumers around the world, and helping society meet the challenges of the COVID crisis.
We remain firmly focused on executing our strategies of superiority, productivity, constructive disruption and improving P&G’s organization and culture to deliver balanced top-line and bottom-line growth along with strong cash generation.
Source: Financial Times
Overall, we believe that there are many reasons for encouragement in Procter & Gamble’s recent report and we are further encouraged by the fact that the company expects to initiate stock buybacks in fiscal year 2021. Specifically, Procter & Gamble has outlined plans to spend $7-9 billion on share buybacks (raising its prior figures calling for share buybacks of $6-8 billion).
Source: Seeking Alpha
For income investors, all of this points to strength as Procter & Gamble is fully viable for portfolio consideration. During the most recent quarter, Procter & Gamble reported $4.7 billion in operating cash flow and 95% adjusted free cash flow productivity. Procter & Gamble also returned a significant amount of cash back to shareholders (common stock repurchases worth $2 billion and $2 billion in dividend payments).
Source: Author via Tradingview
Continued evidence of stability gives us several different reasons to consider PG as a stock to buy at current levels. Long positions in the stock provide an annual dividend payout of $3.16 (which gives us a dividend yield of 2.23% at current levels). Given the stock’s favorable dividend payout ratio of 58.64%, we believe that PG offers an excellent opportunity for portfolio investors to generate income that is solidly based on new evidence supporting the outlook for sustainable strength in Procter & Gamble’s corporate earnings results.
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Disclosure: I am/we are long PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.