* Reports Q1 2020 results on Tuesday, Oct. 22, before the open
* Revenue expectation: $17.46 billion
* EPS expectation: $1.23
After seeing four consecutive quarters of explosive growth, investors have built in strong expectations from Procter & Gamble (NYSE:PG) before its fiscal first-quarter earnings on Tuesday.
Going into this earnings season, the shares of the world’s largest maker of household products have surged 45% during the past 12 months, massively outperforming its peers and the benchmark S&P 500 Index.
In July, the maker of Dawn dish-washing soap, Bounty paper towels and Crest toothpaste reported its best quarter of organic sales in more than a decade, helped by strong demand for its beauty and health-care products.
Organic sales growth, which excludes items like acquisitions and currency effects, expanded a higher-than-expected 7%, far surpassing last year’s 1% growth. The company beat its 4% organic-sales growth target for the fiscal year by a full percentage point.
What’s fueling these share price gains is the company’s success in its turnaround strategy to cope with changing consumer needs and smaller competitors. The demand for P&G shares also rose this year as investors shifted their funds to stocks that provide safety in turbulent economic times.
Under Chief Executive Officer David Taylor, Cincinnati-based P&G has cut its roster of brands from 175 to 65, focusing on the 10 product categories where the margin is highest. During the course of that process the company has also eliminated 34,000 jobs through a combination of brand sales and buyouts, as well as plant closures—slashing more than $10 billion in costs.
Vulnerable to Sell-Off?
From a big consumer staple giant like P&G it wouldn’t be fair to expect a blow-out quarter every time, and the risk of underperformance makes its stock vulnerable to some level of sell-off on any negative earnings surprise.
Another factor that could take some of the steam out of P&G shares is that, because of its defensive nature, it attracted a lot of cash this year as fear of a global recession grew amid the U.S.-China trade war. Once that dispute settles, or the risks to growth recede, investors might again shift their funds to riskier assets, hurting P&G stock.
That being said, we still find P&G a great long-term investment for income-seeking investors, given the company’s successful response to dwindling consumer brand loyalty. For example, the beauty segment saw organic sales rise 8% on strong results from its SK-II and Olay skin care brands.
The other reason to be optimistic about P&G’s next fiscal year outlook is that consumers are willing to pay more for the company’s products. P&G started implementing phased price increases last summer after failing to revive growth by doing the opposite. The shift in pricing strategy will be completed by February, which could boost prices between 4%-10% on products including its Pampers, Bounty, Charmin and Puffs brands.
Bottom Line
P&G stock remains our favorite pick for income-seeking investors. It's one of the largest dividend payers in the U.S. — distributing $2.98 per share annual dividend for a yield of 2.6% — and a track-record that's hard to match. The maker of Pampers diapers has hiked its payout for 62 consecutive years.
Now that growth is back on track, investors should expect more hefty dividend hikes and we see little reason to abandon this consumer powerhouse, even if its stock goes through some weakness.