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Just Buy This 15% Yielder: The Procter & Gamble Company (PG)

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The Procter & Gamble Company (NYSE: PG) is an American consumer goods company with products that include pet foods, cleaning agents and personal care products.

Procter & Gamble’s Earnings

P&G beat the analysts’ estimates in 2Q 2013 and reported earnings per share of $1.39; guidance range was $1.18 to $1.25 per share. Core earnings per share grew 12% to $1.22, while core operating income was up 0.11%. Core gross margin also increased by 0.11%, thanks to cost savings and higher productivity. The free cash flow stood at $3.1 billion in the quarter, which also beat the company’s estimates. Out of this, $1.6 billion was used up in dividends while $1.4 billion was spent in share repurchases.

In the U.S. laundry detergents division, the Gain and Tide brands have done really well. Tide’s market share was up 1.5% from the prior year, while Gain’s share was close to 15%. The auto dishwashing detergents have also shown a significant growth during the past year, as Cascade’s market share has risen 1.5% to 60%. Gillette’s market share also grew 2% to 74% in the U.S. blades and razors segment. The Fusion franchise has gone up more than 1% to 37.5%, while the MACH3 enjoys a healthy 21% market share.

In the developing markets, organic sales were up 7% during the latest quarter. The BRIC markets grew by 11%, with India and Brazil yielding a growth of 20%. One of the key developments in this region was the expansion of the company’s oral care portfolio. Over the last 4 years, P&G has expanded its oral care portfolio to 34 countries. Oral care shipments grew more than 50% in 2Q13 amid the launch of 3D white toothpastes. Moreover, the company has plans of launching its oral care in Australia this year. Gillette’s latest breakthrough, Gillette Guard, has shown a lot of promise in India and Egypt lately; the company has further plans of testing it in other developing markets where the double-edge blades are still the way to go.

Valuation

Procter & Gamble is trading at a forward P/E (1yr) of 17.29x and has a mean recommendation of 2.2 on the sell side. Using the industry’s earnings multiple of 15.6x, we can value P&G’s stock. However, as P&G is expected to perform well above its industry, we would value it using a premium of 20%. Hence, a forward P/E (1yr) of 18.72x would be used.

According to high estimates, we value P&G at $85.18, depicting an upside potential of almost 12%. Incorporating a dividend yield of 3% into this yields a total return of 15%. In short, P&G is one of the top buys in its industry, if not the best.

Industry

P&G’s biggest rival, Unilever plc (ADR) (NYSE: UL), recently released its 2012 earnings. The company’s revenues were up 10.5% to €51.3 billion. Earnings per share grew 5% to €5.14, while the core earnings per share were up to €1.57, thanks to high levels of operational efficiency. While the Americas grew by 7.9%, Europe saw a growth of almost 0.8%. Home care segment grew by 10.3% whereas the Personal Care segment saw a growth of 10%. Unilever is trading at a forward P/E (1yr) of 17.28x, has a PEG of 3.46, and a mean recommendation of 2.3 on the sell side. This suggests that though the company is doing great, its stock is still rather expensive when compared to P&G. In short, it’s a good buy but not as attractive as P&G.

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