3 Reasons The Procter & Gamble Company (PG)’s Stock Is Overvalued

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Another large competitor is Kimberly Clark Corp (NYSE:KMB), whose Kleenex, Scott, and Huggies brands go head to head with Procter & Gamble every day. Though Kimberly-Clark’s 1.8% expected revenue growth won’t make headlines, this tops Procter & Gamble as well. Finally, Unilever plc (ADR) (NYSE:UL) and their Dove brand, competes with multiple Procter & Gamble offerings, and this company is expected to lead the pack with revenue growth of 8.4%.

If Procter & Gamble had the best gross margin in the industry, their anemic revenue growth might not be a big deal. Procter & Gamble’s gross margin of 50.9%, does beat out both Kimberly-Clark’s gross margin of 33.66%, and Unilever at 42.11%. However, they can’t match Colgate-Palmolive at 58.4%. Since Colgate-Palmolive has an equally impressive history of raising their dividend, this higher gross margin and better revenue growth makes two categories for Colgate-Palmolive over Procter & Gamble.

Valuation Is Important
One of the bigger issues I have with Procter & Gamble is their current valuation. The stock tends to get ahead of itself periodically, and I believe it is today. To compare companies that all pay good dividends, we need something beyond the PEG ratio that incorporates their dividend yield as well. I think the PEG+Y ratio that Peter Lynch used makes the most sense.

The PEG+Y is sort of like a reverse PEG ratio. The formula is the company’s expected growth rate, plus their dividend, divided by their P/E ratio. This allows investors to compare companies including both their growth and yield, relative to their valuation. With this ratio, the higher the number the better. A higher number means more growth and income relative to the P/E ratio.

Procter & Gamble’s ratio is comprised of their 8.03% expected growth rate, plus their 2.94% yield, divided by their forward P/E ratio of 18.78. This gives the result of 0.58. By comparison, the only one of their peers that scores worse is Unilever with a PEG+Y of 0.51. On the other hand, Colgate-Palmolive looks better at 0.67, and Kimberly-Clark looks better still at 0.83.

While Kimberly-Clark and Unilever have their own attractive attributes, it’s the comparison with Colgate-Palmolive that makes me think investors are overpaying for Procter & Gamble. Colgate-Palmolive is expected to have better revenue growth, has a better gross margin, and their stock is more reasonably valued than Procter & Gamble. Like I said before, I like Procter & Gamble’s products, but the stock seems overvalued at current prices.

The article 3 Reasons This Stock Is Overvalued originally appeared on Fool.com and is written by Chad Henage.

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