Wednesday, December 3, 2008

Marcial: Procter & Gamble, Durable in a Downturn

Marcial: Procter & Gamble, Durable in a Downturn

In these scary times—when many companies are ratcheting their sales and earnings guidance lower—where do investors turn for stability and predictability? Only a few of the mightiest of the blue chips have been able to weather the global financial crisis and economic recession without big hits to their earnings power.

Procter&Gamble (PG), the world's largest consumer-products company, is one of those few. "P&G's perfect marks for price stability and earnings predictability, and its healthy dividend yield, make it a valuable holding in a diversified portfolio," says Orly Seidman, an analyst with independent investment research outfit Value Line (VALU).

Known for such consumer standbys as Tide laundry detergent, Pampers disposable diapers, and Duracell batteries, P&G has demonstrated over the years that regardless of economic conditions, it can deliver steady returns on equity and predictable earnings growth year after year. That's no easy accomplishment,

Strong Return on Equity

"P&G has withstood the economic headwinds a little better than the rest of the crowd," says Eric Schoenstein, co-manager of the Jensen Portfolio (JENSX) fund, which concentrates its stock holdings in companies that have posted a yearly 15% return on equity (ROE) in each year over the past 10 years, A stock doesn't get into the portfolio unless it has met this hurdle. A strong ROE, explains Schoenstein, is one of the key qualities a company must have to sustain its competitive advantage—and earnings growth—over the years. With P&G sustaining such a solid performance in good or bad economic times, it exceeds this basic measure, he says.

Certainly the financial crisis and economic downshift have had an impact on the stock, but to a lesser degree than other companies' shares. Trading at a 52-week high of 75.18 a share on Dec. 12, 2007, the shares had slid to 61.44 by Dec. 2—a 27% decline, vs. the 40% plunge in the broader market.

The drop has made P&G an even more attractive investment, says Schoenstein, as "it has further widened the gap between the stock price and its intrinsic value." While the shares have fallen, the company's earnings growth has continued to advance, he says.

The consumer-products titan advertises that "3 billion times a day, P&G brands touch the lives of people around the world." But that doesn't necessarily guarantee Wall Street is bullish on the stock. Many analysts warn that sales of consumer products could dry up in a downturn. That's one reason why just about half of the 21 analysts who follow the company recommend buying the stock, while the other half suggest holding it, according to data from Bloomberg. None of the analysts in the group rates the stock a sell.

  • Marcial: Two Thumbs Up for RIM
  • Marcial: Apple Is Ripe for the Picking
  • Marcial: Apple Is Ripe for the Picking
  • No comments: