Procter & Gamble’s 10 Core Brand Categories
Procter & Gamble has 10 core brand categories which the company is focusing on:
- Oral Care: Key brands are Crest and Oral-B
- Baby Care: Key brands are Pampers and Loves
- Family Care: Key brands are Bounty and Charmin
- Feminine Care: Key brands are Always and Tampax
- Grooming: Key brands are Gillette, Venus, and Braun
- Fabric Care: Key brands are Tide, Ariel, Gain, and Downy
- Personal Health Care: Key brands are Metamucil and Nyquil
- Skin & Personal Care: Key brands are Olay, SK-II, and Old Spice
- Home Care: Key brands are Dawn, Febreeze, Swiffer, and Cascade
- Hair Care: Key brands are Pantene, Head & Shoulders, Herbal Essence, and Rejoice
Source: Procter & Gamble 2015 Shareholder Meeting Presentation, slide 19
Procter & Gamble Co (NYSE:PG) is a global business. With that said, the company is focusing on two key markets to drive profits: China and the United States.
Competitive Advantage
When I last analyzed Procter & Gamble I wrote that “Procter & Gamble’s is its strong brand portfolio of disposable consumer products”.
That is just as true 50 years ago as it was last year. It is still true today. Procter & Gamble’s real value comes from its portfolio of high quality brands.
The company’s longevity comes from its intelligent focus on ‘low tech’ disposable products; things like deodorant, shampoo, razor blades, toilet paper, feminine products, and paper towels. These are things people will always need.
Procter & Gamble supports its (now more focused) portfolio of brands with large advertising spending. The company spends between $8 billion and $9 billion a year on advertising. This amount of advertising buys tremendous product awareness that smaller competitors cannot match.
The massive size of Procter & Gamble helps it to outspend its rivals. The company can pressure suppliers into lower prices and more favorable financing terms. Inexplicably, Procter & Gamble has only recently taken advantage of pressuring suppliers into longer payback periods:
– 2013 accounts payable of $0.2 billion
– 2014 accounts payable of $1.1 billion
– 2015 accounts payable of $2.3 billion
Procter & Gamble has an average long-term interest rate of 3.4%. The company’s additional ~$2 billion in accounts payable is saving the company around $70 million a year in interest payments.
Cost-Cutting and Restructuring
Procter & Gamble is going to great lengths to focus on its core brands.
The company is either done or nearly done with its brand divestiture program. Procter & Gamble’s most recent large divestitures were Duracell to Berkshire Hathaway, and a portfolio of 43 beauty brands to Coty.
The company is shedding employees as a result of its brand reductions and efficiency focus. Non-manufacturing headcount is down 23% since highs in 2011. The company plans to reduce headcount a further 2 to 7 percentage points.
Manufacturing employee count is down 19% since 2012 highs. Procter & Gamble plans to further reduce manufacturing employee count by another 6 to 11 percentage points.
In addition, the company is restructuring its United States supply chain. The image below shows the before-and-after of this restructuring:
Source: Procter & Gamble Morgan Stanley Global Consumer Conference, slide 18
Procter & Gamble’s Expected Total Return
Procter & Gamble is targeting 7% to 9% long-term earnings-per-share growth. The company saw constant-currency earnings-per-share grow 12% in its most recent quarter.
The company is suffering from currency effects due to the strong dollar. Eventually, the dollar will stabilize versus other global currencies and Procter & Gamble will return to growth.
The question is, can Procter & Gamble really achieve earnings-per-share growth of 7% to 9% a year going forward?
I believe the company can. Here’s how:
– Sales growth of 3% to 4% per year
– Share repurchases of around 2% per year
– Margin improvements of 2% to 3% per year
Procter & Gamble should be able to continue expanding margins as it reaps the benefits of its significant restructuring process.
The company returns nearly 100% of its earnings to shareholders through dividends and share repurchases. I expect this trend to continue. Share repurchases of around 2% of shares outstanding a year are likely (if a bit conservative).
Revenue growth of 3% to 4% will come from a mix of better-focused advertising and continued innovation within the company’s ‘core brands’. It is possible that Procter & Gamble continues to struggle with revenue growth. A downside scenario would see the company growing revenue around 0% to 2% per year. I believe it is more likely the company grows revenue in the 3% to 4% a year range thanks to its high quality brand portfolio.
In addition to Procter & Gamble’s expected earnings-per-share growth of 7% to 9% a year, the company’s stock currently pays a 3.5% dividend. This gives investors in Procter & Gamble expected total returns of 10.5% to 12.5% a year going forward at current prices.
