Thursday, 30 July 2015

P&G: stalwart stock, good shareholder returns but no growth

P&G is stalwart stock we all know that with some strong, well-known consumer brands:

The question is what price to buy the stock. The good news is that whilst it is over-distributing returns to shareholder equal to over 5% of market cap - and given that net debt is only around x1 ebitda this is hardly a problem...

...underlying volumes/sales are very dull and FX is a negative coming back into US dollars. 

 Nevertheless pricing continues to be good...but this alone cannot help to drive earnings per share growth materially...even on a core (constant FX) basis.  Citing FX of course is still likely to take growth levels back into negative territory. 

The company talked about negative / competitive market dynamics too plus there is an added complexity of issues with the long-troubled Venezuelan operations (which blighted via a charge today's reported Q4 numbers).  

P&G announced its decision to stop consolidating the results of its local Venezuelan operations in its GAAP financial statements...The change in accounting treatment reflects the Company's inability to convert currency or pay dividends.

For me a buying a stalwart with good brands and a shareholder remuneration focus at less than x14 forward EV/ebit makes sense - especially for a more income/cautious centred investor.  Unfortunately today's numbers are akin to more like x16 EV/ebit prospectively (assuming over time some element of FX normalisation - and hence return to FY14A levels of profitability).  

So for me - disappointingly - we would need to be in the lower US$70s to get excited.  Fine for income players and I like the discipline as shown by pricing/not chasing volume per se but not compelling enough for me to buy today with this new and updated information.  

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