Inflation Isn't Stopping This Consumer-Products Titan
Earnings season is underway...
In the span of about four weeks every quarter, investors are bombarded with quarterly reports from the majority of companies in the S&P 500, Dow Jones, and Nasdaq 100 indexes. These reports include quarterly results, business updates, and commentary from executives. So they can give a pretty good picture of what's going on.
Right now, investors are on the lookout for any commentary on today's market "boogeyman" – inflation.
As we've seen in the Producer Price Index ("PPI"), which measures input and materials costs for companies, businesses are having to pay more than ever for the supplies they need to make finished products. In 2021, the PPI rose 9.7% from the year before, marking the highest reading for producer inflation since data going back to 2010.
Now companies are faced with a tough choice... With input costs rising, they're seeing margins (and profits) begin to shrink. To solve this, some businesses are raising prices to pass the costs on to customers. But this comes at the risk that folks will just buy less.
Today's company is going down that route. But in its case, there's little chance that consumers will turn away from its products...
Procter & Gamble (PG) is a titan of the consumer and household-products industry. Whether you know it or not, you most likely have its products in your cupboard – or used them today.
Procter & Gamble owns more than 20 brands that bring in $1 billion or more in annual sales alone, including universally known brands like Head & Shoulders, Braun, Gillette, Crest, Dawn, Febreze, Bounty, Charmin, Pampers, and many more.
It also has another 20 brands that do more than $500 million in annual sales.
While these products may not be exciting... they are usually reliable. And selling these basic brands helps Procter & Gamble deliver steady sales growth.
The company also has a wide geographic reach. It has operations in around 70 countries, and sells its products in more than 180 countries worldwide. Consumers buy a Procter & Gamble product more than 40 billion times a year.
And it loves to reward shareholders...
Procter & Gamble has paid a dividend every year since 1891. And that payout is still growing... with Procter & Gamble raising its dividend every year for 65 consecutive years. Over the past five years, its dividend has grown about 30%.
A large part of Procter & Gamble's earnings goes toward paying the dividend. Procter & Gamble's dividend-payout ratio – which shows the dividend payment as a percentage of earnings – sits at 61.5%. So, for every dollar of earnings Procter & Gamble pulls in, it pays out $0.61 in dividends. That's more than double the S&P 500's dividend-payout ratio of 30%.
In addition, the company buys back loads of shares. Over the past five years, the company has reduced its shares outstanding by about 10% through share repurchases.
In normal times, Procter & Gamble is a company that provides steady income and sales. And it's holding up just fine in today's inflationary environment.
Procter & Gamble sells products that consumers will come back for time after time, regardless of the price. Just take a look at Procter & Gamble's recent quarter...
The household-products giant reported second-quarter earnings per share ("EPS") of $1.66 and revenue of $20.95 billion, beating Wall Street's expectations.
In a press release, CEO Jon Moeller noted that Procter & Gamble grew earnings over the previous quarter despite "significant cost headwinds." To offset these costs, the company raised prices by an average of 3% across the board.
But these price hikes didn't hurt demand. Procter & Gamble's organic sales, which exclude the impact of acquisitions and divestitures, rose 6% – beating the estimate of 3.7% growth. This came from the 3% increase in prices, as well as a 3% increase in sales volume.
That means not only did people pay higher prices, but they also bought more of Procter & Gamble's goods.
This is the power of selling the basic necessities that people rely on. These brands are always in demand, in good times and bad.
No matter what's going on in the economy, people will always need paper towels, toilet paper, and toothpaste. And right now, Procter & Gamble is able to easily pass on higher costs to customers as a result. That should be a tailwind for the shares.
Sometimes investing is simple.