Procter & Gamble (PG) is one of the best defensive stocks in the market – especially during challenging times. That said, however, P&G’s 2023 Q2 results, published last week, have not lived up to expectations. Sales volumes were down. Revenues declined, and all of the company’s divisions reported declining sales.
At the time of writing, the share price had pulled back about 5% from its level immediately prior to its results announcement.
Here’s what we learned from the PG Q2 Earnings Call.
Revenues Declined…
Revenues fell by 1% in the quarter compared to the corresponding quarter last year. However, at $20.77 billion they marginally outperformed the average forecast of $20.75 billion. On the face of it, not a bad result when consumers are tightening their belts.
…But Were Held Up By Increasing Prices
P&G has raised its prices pretty aggressively over the past few months. This has added up to 10% to its sales growth, according to PG’s CFO Andre Schulten. That’s been a huge positive for the company, but leads us to believe that sales volumes could be as much as 10% down on the year – and that would point to a potential loss of market share.
Sales Results Have Been Challenging Due To Russia & China
Sales fell by 6% in the quarter. That’s faster than the 3% drift in the first quarter of fiscal 2023, but this isn’t the complete story.
You see, responding to the continuing conflict in Ukraine, PG took the decision to reduce its operations in Russia. No more Oral-B and Tide for them! Combined with the effects of the covid pandemic and lockdowns in China (where sales were down by 7% on the previous year), this accounted for much of the decline in sales.
But Stripping Out These Factors, Organic Sales Growth Is Good…
If we look at sales excluding the factors noted above, organic sales grew. In fact, organic sales grew by 5% worldwide, and by 6% in the United States.
And Market Share Is Holding Strong
Globally, P&G’s market share is on a par with last year. More than half of the company’s top 50 category combinations have at least held or grown market share. In the United States, 7 of the 10 categories increased their market share, with quarterly market share growth of 0.5% when measured against the same quarter last year.
Inflation and Currencies Cost P&G
A major headwind that P&G is navigating is cost pressures from rising prices of materials and unfavorable exchange rates.
“On the bottom line, core earnings per share were $1.59, down 4% versus prior year,” said Andre Schulten. “On a currency-neutral basis, core EPS increased 5%. Core operating margin decreased 170 basis points, primarily due to gross margin pressure from commodities and foreign exchange.”
However, the company saw some easing of price pressures and currency constraints in the quarter, and expects this trend to continue, albeit slowly, moving forward.
Gross Margins Are Down, But P&G Will Continue to Raise Prices…
After stripping out currency effects, gross margins declined by 70 basis points. It believes that there will be a slight improvement in the headwinds it faces – and this helps margins to improve. This said, P&G will be raising prices.
Its experience has shown once more that people won’t stop cleaning, washing, and maintaining self-care. To date, consumers have taken price rises in their stride – specifically in non-discretionary items.
As Schulten remarked, “Consumers don’t stop washing their hands or doing their laundry.”
P&G Expects The Macro Outlook To Improve
It believes that there will be mild improvements in the effect of foreign exchange on its revenues, though it continues to remain cautious about how these may impact its bottom line. Schulten did say, however, that the company is likely to reinvest extra cashflow in its businesses.
The company expects performance to improve in China, and the United States to remain relatively strong. It does, however, believe that high inflation in Europe may soften its markets there.
Taking all of these factors into consideration, P&G has increased its forecast for sales growth in 2023 from a range of 3% to 5% to a range of 4% to 5%.
With adjusted free cash flow productivity estimated to approach 90% in the second half, the company expects to pay in the region of $9 billion in dividends and repurchase as much as $8 billion of shares.
Summing up an outlook for the future, CEO Jon Moeller said:
“The world seems to want everything to be better, as do I. That’s really not the reality… It’s not the time to be taking guidance to the top range of possibility.”
Final Thoughts
The big banks believe that we are headed toward a mild recession. If this is true, then consumer defensive stocks like P&G should perform relatively well.
We shouldn’t get carried away with P&G’s headline numbers. Extenuating circumstances have dented performance in the first half of 2023. Underneath this, its sales are robust despite increasing prices, and market share is holding up or improving. There’s a huge dose of brand recognition in the market, and consumers are demonstrating huge loyalty to P&G brands.
In short, it’s an incredibly resilient business that has been through all of this before – and raised its dividend for 67 years on the spin. Consumers aren’t going to abandon its brands.
Trading at around $143, on a PE multiple of around 25, the stock cannot be said to be cheap. But the forward dividend of around $3.65 with a yield of more than 2.5% ─ and a payout ratio of 63% ─ makes the stock attractive for long-term holders. Especially those who seek to invest in a well-managed company whose sales should weather any size of economic storm on the horizon.