Is The Procter & Gamble Company (PG) Destined for Greatness? – Unilever plc (ADR) (UL), Kimberly Clark Corp (KMB)

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let’s take a look at what The Procter & Gamble Company (NYSE:PG)‘s recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you’re about to see tell The Procter & Gamble Company (NYSE:PG)’s story, and we’ll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company’s become more efficient over time. Since profits may not always reported at a steady rate, we’ll also look at how much The Procter & Gamble Company (NYSE:PG)’s free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If The Procter & Gamble Company (NYSE:PG)’s share price has kept pace with its earnings growth, that’s another good sign that its stock can move higher.

Is The Procter & Gamble Company (NYSE:PG) managing its resources well? A company’s return on equity should be improving, and its debt-to-equity ratio declining, if it’s to earn our approval.

Healthy dividends are always welcome, so we’ll also make sure that P&G’s dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let’s take a look at P&G’s key statistics:

PG Total Return Price data by YCharts.

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	8.5%	Fail
Improving profit margin	(17.4%)	Fail
Free cash flow growth > Net income growth	(19.4%) vs. (3%)	Fail
Improving EPS	5%	Pass
Stock growth (+ 15%) < EPS growth	39.5% vs. 5%	Fail

Source: YCharts.
*Period begins at end of Q4 2009.

PG Return on Equity data by YCharts.

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(4.6%)	Fail
Declining debt to equity	13.8%	Fail
Dividend growth > 25%	27.7%	Pass
Free cash flow payout ratio < 50%	45.8%	Pass

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we’re going
P&G doesn’t put forth a particularly compelling argument for its stock today. Nearly all of its price growth has been the result of higher valuations, which makes future returns far from certain and which contributes to several of its failing grades. Can P&G turn its drifting ship around and reclaim some positive momentum this year — and possibly earn more than just three out of nine passing grades the next time we examine it?