Procter & Gamble stock (NYSE:PG) serves as an excellent illustration of a quality company that comes at a hefty price. As a consumer staples giant renowned for its globally popular personal care, fabric care, and home care brands, P&G has maintained a premium valuation despite rising interest rates. While investors may continue to appreciate the company’s robust qualities along with its legendary dividend, the stock’s hefty valuation could limit future returns. Thus, I am neutral on PG stock.
What’s Holding P&G’s Hefty Valuation Together?
P&G’s shares are currently trading at a forward P/E of 24.3 based on the midpoint of management’s guidance ($6.34) for Fiscal 2024. But what’s holding such a hefty valuation together? This question becomes all the more interesting when we consider that this multiple aligns with the company’s five-year historical average P/E and even exceeds its decade-long average. Given the surge in interest rates lately, one would expect P&G’s valuation to be hovering below both its five-year and 10-year historical ranges.
In my view, investors have been willing to trade P&G at a hefty multiple due to the company’s qualities, which ensure stable and predictable results in the face of uncertainty. The company’s legendary dividend can also be listed as a significant factor driving investors toward PG stock. Let’s break down these factors.
Robust Results amid Uncertainty
P&G’s Fiscal Q4-2023 performance stands as a stellar demonstration of a company’s ability to thrive amid the challenges of inflationary pressures and volatile foreign exchange conditions. This success is attributed to the enduring demand for its products and its formidable pricing strength.
Notably, P&G achieved remarkable results, with net sales reaching $20.6 billion, representing an impressive 5% year-over-year increase. This was primarily driven by a robust 8% organic sales surge, which more than offset the negative impact of unfavorable foreign exchange rates.
For some broader context, this 8% growth was derived from a 7% increase from loftier prices and a 2% boost from a favorable product mix, partially offset by a 1% decrease in shipment volumes. Surprisingly, even with significantly elevated prices, consumers exhibited minimal changes in their purchasing habits. This observation strongly supports the idea that P&G’s products display a high degree of inelasticity, as one would anticipate for everyday household essentials.
Meanwhile, during the quarter, P&G’s gross margin saw an impressive expansion of 380 basis points compared to the previous year. This margin expansion was driven by an underlying increase in prices that outpaced the relevant growth in the cost of goods sold. Consequently, earnings per share (EPS) grew by a meaningful 13% to reach $1.37.
Looking ahead, management’s forecast of EPS growth ranging from 6% to 9% for Fiscal 2024 exudes confidence in the company’s future prospects. Overall, it’s easy to see how the company’s highly predictable and durable business is able to produce resilient results during a tough economic environment—an aspect that investors deeply value.
P&G’s Legendary Dividend Remains Intact
The second catalyst that has acted as a favorable attractor for investors in PG shares is the company’s legendary dividend, which remains intact. With an impressive streak of 67 consecutive years of dividend increases, P&G’s unwavering commitment to rewarding shareholders is beyond dispute. While the current dividend yield of 2.4% might appear modest in the face of rising interest rates, it’s the consistent and well-supported dividend hikes that truly captivate investors.
P&G is a perennial favorite among retirement and income funds, with the stock frequently occupying a prominent position in their portfolios due to its dependable dividend. This enduring appeal should continue to bolster the stock’s substantial valuation.
Is a Class Action Lawsuit Over Phenylephrine Harming the Stock?
P&G recently made headlines alongside other major players in the consumer staples and healthcare industries, including Kenvue (NYSE:KVUE), GlaxoSmithKline (NYSE:GSK), and Walgreens Boots Alliance (NASDAQ:WBA). They are currently facing allegations that the oral use of nasal decongestant phenylephrine is ineffective in countering cold remedies.
While it is still early to predict the outcome of this class action lawsuit, I believe it will likely have a minimal impact on P&G’s stock. This isn’t about a harmful product but rather concerns the potential issue of inaccurate marketing. The fact that P&G’s shares have remained stable amid these developments highlights the market’s relatively subdued reaction to the lawsuit.
Is PG Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Procter & Gamble features a Moderate Buy consensus rating based on 10 Buys and six Holds assigned in the past three months. At $168.87, the average Procter & Gamble stock forecast implies 9.5% upside potential.
The Takeaway
In conclusion, Procter & Gamble presents a case study as a quality company with a hefty valuation. Despite rising interest rates, PG stock maintains a premium price, mainly driven by the company’s resilient and predictable performance in the face of economic challenges.
In fact, P&G’s recent fiscal results, marked by strong sales growth and expanding margins, showcase its ability to thrive in uncertain times. Additionally, the company’s legendary dividend track record continues to attract income-focused investors.
That said, I believe that P&G’s hefty valuation will limit investors’ potential for meaningful returns, moving forward. While investors are likely to continue to trade shares of P&G at elevated levels, it’s hard to see the company undergoing a further valuation expansion. In the meantime, P&G’s projected EPS growth for Fiscal 2024 is respectable but won’t allow P&G to grow into its valuation anytime soon. Thus, I believe that shares will continue to trade mostly sideways with only modest upside prospects ahead.
