Procter & Gamble: A Rock-Solid Refuge
We're still a good ways off from the mood that dominated in the dark days of late-2008 and early 2009, but fear is palpable in the markets right now. So can investors look to consumer goods giant Procter & Gamble (NYS: PG) as a safe place to hide during this turmoil?
For the its fiscal fourth quarter, P&G reported sales of $20.86 billion, up 10% from 2010 and diluted earnings per share of $0.84, which was an 18% increase from last year. Both the top and bottom line vaulted the expectations of Wall Street analysts who were anticipating per-share profit of $0.82 on revenue of $20.63 billion. While that may sound pretty great, it isn't all sunshine and lollipops in P&G's world right now.
As last week's market action clearly demonstrated, investors are worried about global economic growth. And they're not alone. Procter & Gamble's management is concerned about slowing growth -- particularly in developed markets like Europe and the U.S. These concerns may only be further fueled by Standard & Poor's controversial downgrade of the U.S.'s debt rating.
Meanwhile, the company continues to face mounting pressure from rising commodity prices. Prices of many of the basic materials that P&G uses to make its products have been steadily rising and eating into the company's gross margin. These costs alone are expected to rise by $1.8 billion for P&G next year.
As with the economic picture, P&G isn't alone in facing the commodity challenge. Tuning into any of the recent earnings reports in the consumer goods sector -- from Colgate-Palmolive (NYS: CL) to (NYS: KO) and Clorox (NYS: CLX) -- we can see the same refrain repeated over and over when it comes to material prices.
While misery may love company, this doesn't make it a whole lot easier on P&G. The company has to walk a careful line when it comes to price increases. Forgo price increases and it'll draw the wrath of investors -- many of whom invest in P&G specifically because the strong brands should give it the ability to raise prices -- while hefty price increases could push still-strapped consumers into the arms of cheaper private-label goods.
These challenges contributed to a relatively muted fiscal 2012 outlook from P&G. Management provided a wide guidance range, saying that it expects organic sales growth of 3% to 6% and core earnings-per-share growth of 6% to 10%. At the midpoint, the EPS range of $4.17 to $4.33 is a penny below what analysts had been forecasting.
Forget all of that
Those are very real challenges for P&G, but I don't think investors need to be particularly concerned right now. With fear starting to course through investors' veins, there may be a so-called "flight to quality" where investors start to hunker down and look for the safest investments out there. With a strong, stable business, a price-to-earnings ratio well below its range over the past decade, and a 3.5% dividend, P&G may start flashing on many scared investors' radars.
While that may be a relatively short-term storyline for P&G, the bigger picture still looks good as well. The company has a very strong and growing footprint in some of the highest-growth economies around the world and some of the strongest consumer brands of any of the major branded-goods companies.
You're not going to wow too many people at cocktail parties talking about your Procter & Gamble stock, but as a stable, core holding of your portfolio, you could do a lot worse than P&G.
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At the time this article was published The Motley Fool owns shares of Clorox and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Coca-Cola, and Clorox. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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