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The Coca-Cola Company (KO), McDonald’s Corporation (MCD), The Procter & Gamble Company (PG): Can This Blue Chip Keep up the Turnaround?

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Questioning certain companies in today’s stock market is almost unheard of. When you think about names like The Coca-Cola Company (NYSE:KO), McDonald’s Corporation (NYSE:MCD), or The Procter & Gamble Company (NYSE:PG), many investors assume that all of these companies are stocks that they can buy at any price and hold forever. While it’s true that investors may be able to buy the shares at a decent price and tuck them away for many years, I have yet to witness a stock that is completely immune to valuation concerns. In Procter & Gamble’s case, the company has improved its business, but investors buying at today’s prices need to understand that this stock is no sure bet.

That’s More like It

For several years when I read over The Procter & Gamble Company (NYSE:PG)’s quarterly reports, I couldn’t help but notice that the company said it witnessed organic growth (i.e. price increases) even when volumes declined. With a very large company like this, I prefer to see volume growth, which is a more reliable indicator of increased demand.

The Procter & Gamble Company (NYSE:PG)Some of The Procter & Gamble Company (NYSE:PG)’s competitors are also very large, well-respected names, and it’s nearly impossible not to compare these companies side-by-side. Companies such as The Clorox Company (NYSE:CLX), Colgate-Palmolive Company (NYSE:CL), and Kimberly Clark Corp (NYSE:KMB), are everyday competitors to the multi-billion dollar brands of Procter & Gamble. Over the last several years, the difference between real growth and fake growth has been each company’s willingness to innovate and introduce new products.

In the current quarter, The Procter & Gamble Company (NYSE:PG)’s net sales increased 2%, which is about in-line with the 2.5% sales growth at Colgate-Palmolive Company (NYSE:CL), and the 1% increase at both The Clorox Company (NYSE:CLX) and Kimberly Clark Corp (NYSE:KMB). However, Kimberly-Clark and Colgate-Palmolive both saw strong volume growth, whereas Clorox’s volume growth was weak, and Procter & Gamble’s volume growth was mixed.

There was a very clear pattern at The Procter & Gamble Company (NYSE:PG) that held across the board. When the company left their product lineup alone, competition and promotional pricing caused volumes to drop. When Procter & Gamble innovated and introduced new products, volume increased. The good news for investors is, in 3 of the 5 operating segments volume was up, and it seems like Procter & Gamble is finally getting the message that name brands alone aren’t enough to generate sales growth.

3 Issues Standing in the Way

If the The Procter & Gamble Company (NYSE:PG) story ended with the company increasing its organic volume growth, it would be hard to argue against a dividend aristocrat with a better than 3% yield. However, the company still seems to have several challenges that long-term investors should be aware of.

First, even though The Procter & Gamble Company (NYSE:PG) makes a big deal of it share repurchases, the bottom line effect on the company’s diluted share count leaves something to be desired. In the last year, Procter & Gamble retired over $4 billion worth of shares, but because of new shares being issued, the overall diluted share count only dropped by 0.24%.

By comparison, Colgate-Palmolive Company (NYSE:CL) repurchased enough shares to reduce its diluted share count by 2.36%, and Kimberly Clark Corp (NYSE:KMB) retired 1.66% of its shares. Of this group, only The Clorox Company (NYSE:CLX) saw its diluted share count increase. The point is, if The Procter & Gamble Company (NYSE:PG) has to spend $4 billion to retire 0.24% of its shares, investors should wonder if this money could be spent more wisely elsewhere.

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