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P&G is no gamble

OVERSEAS STOCK OF THE YEAR: Procter & Gamble (PG:NYQ)
January 5, 2012

Last year was tempestuous, but 2012 could be as bad, perhaps worse. Against that backdrop, equity investors should be seeking out low-risk homes for a good chunk of their capital. And that's why we're suggesting shares in US consumer goods giant Procter & Gamble (P&G).

IC TIP: Buy at 64.43p
Tip style
Growth
Risk rating
Low
Timescale
Long Term
Bull points
  • Refocusing on high-growth markets
  • Portfolio of powerful brands
  • Improving outlook for costs
  • Attractive and stable dividend
Bear points
  • Playing catchup in emerging markets
  • Raw material costs have hit margins

Granted, P&G's business is remarkably similar to that of Unilever, whose shares we recommended buying in November. Both are large, cash-generative operations with strong consumer brands that should be be able to weather the worst that the global economy can throw at them. The US is home to four such global giants in the field of fast-moving consumer goods (FMCG). As well as P&G, there is Kimberly Clark, Johnson & Johnson, and Colgate Palmolive.

The shares of each offer well-supported dividend payouts that generate a decent yield. And, with the US economy looking in better shape than Europe's, they are benefiting from better domestic demand while their shares benefit from a flight to the safety of US blue-chips.

But we’re focusing on the biggest. In revenue terms, P&G is the world’s largest supplier of fast-moving consumer goods, ahead of Unilever, with whom it competes across many household and personal-care categories. It owns well-known brands including Pampers, Tampax, Head & Shoulders, Gillette, Braun and Oral-B. In all, P&G owns 24 so-called ‘power brands’, each of which generates over $1bn in annual revenue. Several more brands, such as Lenor detergents and Downy fabric enhancer, are pushing close to this level.

The strength of these brands gives P&G pricing power. At least, it does when rivals aren’t discounting at unsustainable levels, which they were doing until recently when the industry adopted a more rational approach to pricing to claw back rising raw material costs. That means P&G has been able to push prices higher this year without damaging sales volumes - in fact, volumes in the first quarter of 2011-12 climbed 2 per cent, despite a 4 per cent increase in prices and strong growth to beat in the corresponding period a year earlier.

PROCTER & GAMBLE (PG:NYQ)

ORD PRICE:$64.43MARKET VALUE:$177bn
TOUCH:$64.41-$64.4312-MONTH HIGH:$67.72LOW: $57.56
DIVIDEND YIELD:3.6%PE RATIO:14
NET ASSET VALUE:$24.14NET DEBT:43%

Year to 30 JunTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
200976.714.4355164
201078.915.0370180
201182.615.2412197
2012*85.916.4415211
2013*89.417.4449230
% change+4+6+8+9

Beta: 0.4 £1 = $1.553

*JP Morgan forecasts (earnings not comparable with historic figures)

Rebalancing its business away from mature, promotionally-intensive Western economies to faster-growing developing ones helped. In fact, all of P&G's volume growth came from developing markets, with US volumes slipping slightly. Zacks Investment Research, a Chicago-based broker, says P&G has added $5bn in sales in just five years from the four 'Bric' economies alone. A programme to develop its emerging-market portfolios mean revenues in these regions are now growing at around 15 per cent a year. So 45 per cent of P&G's revenues now come from outside the US, two thirds of which come from Asia, Latin America and the Middle East.

And P&G is now taking a leaf out of Unilever's book, launching products specifically for emerging markets. In other respects its product portfolio puts it at an advantage to Unilever. In particular, it has a far larger portfolio of personal-care products, a fast-growing segment that Unilever is spending heavily to bulk up. Meanwhile, like Unilever, P&G is continually tweaking its portfolio, most recently by selling its Pringles snack brand to US rival Diamond Foods.

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P&G also stands to benefit from falling commodity-price inflation - that's good because even the price rises it has pushed through aren’t compensating for that at the moment. Its bosses estimate that the full-year impact of rising raw material costs alone will be an eye-watering $1.8bn, though that figure does not reflect recent falls in the price of oil, plastics, and energy. So, while higher commodity costs have squeezed profit margins, it is likely that this will be reversed in 2012, helped by savings from restructuring.