If you read many of my posts then you should know that I love Consumer Goods Companies (CGC). I wrote many times about beverage champions, such as AB InBev, but I am now trying to dig into the Household and Personal Care Products (HPC) sub sector. I think that, right now, this sub sector should be a part of any long term portfolio focused on quality and income stability because (a) HPC is a Defensive sector (it does best in times of macro uncertainty, but rarely under performs the S&P), (b) Valuations are in line with long term average for most stocks, and (c) Reasonable earnings consensus expectations assure that your portfolio will not suffer aggressive bumps going forward. In this post I will review three corporate leviathans and decide which one(s) would be the best candidate(s) for a prudent portfolio looking for a growing cash yield.
The Procter & Gamble Company (NYSE:PG), the biggest CGC group by sales, just reported results a few days ago and ameliorated its Earnings Per Share (EPS) and organic sales growth outlook for the fiscal year ending in June. The share price automatically jumped 4% on the news, but I am convinced that there is plenty of room for further outlook amelioration going forward. During the last few years, PG has been growing sales at a 3% yearly rate and growing its dividend by high single digits. I think that this is about to change for the best. Great investors such as Bill Ackman who, through his hedge fund Pershing Square, owns about 1% of the company are putting pressure on management to cut costs (PG has a $10 billion cost cutting plan in place) and boost productivity while increasing top line growth. Looking at PG’s numbers it’s clear that there is plenty of room for improvement. In the future, I see top line growth and earnings growth to be more in line with peers (growing sales at 5/6% and earnings at 10%). That said, PG trades at 2013 17x P/E and is expected to deliver a 5% Free Cash Flow (FCF) yield while paying a 3.3% cash dividend yield. This price already reflects a successful turnaround. I like the story but the price seems already rich. I think there are better opportunities on the street.
Colgate Palmolive Company (NYSE:CL), which is less than one third the size of PG, shows much better top line growth and margins than its biggest peer. While PG has better margins in the slowly growing developed world than CL (25% versus 20%), Colgate has considerably better margins in high growth Emerging Markets (30% versus 10%). It’s also relevant to mention that over 50% of CL’s sales come from Emerging Markets while just under 60% of PG’s revenues come from the developed world. CL also offers a great portfolio of products with low price elasticity and, hence, the company enjoys much better pricing power than most of its peers. Besides, CL is implementing a program to improve cost efficiency which, from its relative size, is in line with PG’s $10 billion plan. Growing sales at the 3 year average rate of 6% and trading at 2013 18x P/E while generating a 5% FCF yield I think CL is one of the names to own in this sub sector.