The rock group The Who had a line in one of their iconic songs that applies to the recent leadership change at The Procter & Gamble Company (NYSE:PG) : “Meet the new boss, same as the old boss.”
The largest consumer-products company in the world just announced that its CEO for the last four years, Robert McDonald, will step down and be replaced by his predecessor, A.G. Lafley.
Lafley served as CEO from 2001 to 2009. One of his first tasks will be to find his successor. He is just a caretaker until a long-term replacement can be found. Another priority will be to reverse the company’s lagging growth trend. The Procter & Gamble Company (NYSE:PG) just announced quarterly results that didn’t quite match Wall Street’s expectations.
How will the unusual management shakeup affect the company, its many popular products and equity investors?
Lafley’s previous tenure at Procter & Gamble featured some major acquisitions and mergers, including that of Gillette in 2005. It’s possible that the board of directors wants him to revert to his old ways and grow the company that way.
Speaking of deals, The Procter & Gamble Company (NYSE:PG)’s pending joint venture with Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) of Israel will probably not be affected by the disruption at the top. Dubbed PGT Healthcare, the joint venture will feature plants both overseas and in the United States. The new company is expected to grow Procter & Gamble’s over-the-counter medical-products business, which last year comprised about 4% of revenue.
Lafley must also continue to address The Procter & Gamble Company (NYSE:PG)’s relatively high cost structure. More layoffs, part of a restructuring effort that was initiated in February 2012, might be needed to bring Procter & Gamble inline with its lower-cost competition.
The company might have to refocus away from pricier products, such as the recently introduced Tide Pods. Although it has been a successful product that grew the top end of the laundry-detergent market, the net effect might have been to slow down growth overall. A hallmark of the McDonald era was an emphasis on higher-cost products.
The leadership change probably had its genesis when activist investor William Ackman began a push for McDonald to accelerate the cost-cutting program and deal with slowing growth.
Although the stock has appreciated by about 26% over the last year, Ackman, who holds a large chunk of The Procter & Gamble Company (NYSE:PG) shares in his hedge fund, felt more could be done. And in his mind, McDonald was not the person to do it.
Earnings will need to grow in order for the company to keep increasing its dividend over the long term, which it has done every year since 1956. However, the growth rate has slowed slightly in recent years. A good sign, however, is that the payout ratio is relatively low at 50%. The dividend should be safe, at least for the near term.
Bringing back the old
Some companies have had great success by bringing back former CEO’s to run things.
One of the best examples of this is at Apple Inc. (NASDAQ:AAPL). After being fired in May 1985, the late Steve Jobs was brought back to the helm in December 1996. While he was away, Apple Inc. (NASDAQ:AAPL) floundered and only gained about $1 billion in market cap. It released a string of less-than-stellar products that time has forgotten. However, after his return, Jobs presided over one of the great turnarounds in corporate history.