Investment and Portfolio Management Project: Proct

Investment and Portfolio Management Project: Procter and Gamble (P&G)

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Procter and Gamble (P&G) Company Overview

Procter and Gamble was established in the year 1837 by James Gamble and William Procter and was later incorporated on 5th May 1905. The company has it’s headquarter in Cincinnati, Ohio, United States.  Procter and Gamble Company operate in the consumer goods industry where it provides consumer packaged goods. The products of Procter and Gamble are sold in more than 180 countries around the world. The company sells its products primarily through grocery shops, merchandisers, membership club stores, department stores, drug stores, high frequency stores and e-commerce, salons and neighbourhood stores which are used to serve consumers in the developing countries (Dyer, Dalzell, & Olegario, 2008).

Industry Background

The company operates in five segments, home care and fabric care, grooming, beauty, family care and baby care and health care (Aaker, 2009).  Some of the company’s products include cleaning agents, pet foods and personal care products.  In the year 2005, the company announced its acquisition of Gillette a move that made it the largest consumer goods ahead of Unilever Company. Procter and Gamble acquired partners’ interest in Ibria, in the year 2012, which operate in it health care, family care and baby care segments. Procter and Gamble relinquished food business by selling Pringles snack food business for $2.75 billion to Kellogg’s Company (Hooper, Yenzer, Yosten, & Bradford, 2007).

In the year 2012, Procter & Gamble Company was named by the CEO Magazine as the best company in terms of leadership development. The company was listed number fifteen amongst the most admired companies in the world in the year 2012 by the Fortune magazine (Hooper, Yenzer, Yosten, & Bradford, 2007). In order to expand its market share and reach more areas, the company has acquired many companies such as Norwich Eaton Pharmaceuticals, Folgers Coffee, Iams Company and Max Factor (Hooper, Yenzer, Yosten, & Bradford, 2007).

Financial Overview

Procter and Gamble is listed in New York Stock Exchange. The company is a component of the Dow Jones Industrial Average and S& P stock market indices. The company has been performing well financially with recorded growth in its revenue where it earned $ 77.6 billion in the year 2010, which rose to $ 84.16 billion in the year 2013 recording 8.5% growth in the period of 4 years representing 1.7% annual growth in revenue. The profit of the company has been ranging between $ 12.5 billion and $ 11.1 billion for the same period (NYSE, 2014). The assets of the company grew from $ 128.2 billion in the year 2010 to 139.3 billion in the year 2012 recording a total growth of 8.7%.  The equity of the company grew between 2010 and 2013 by 11.9% from $ 61.4 billion to $ 68.7 billion (Yahoo fiancé, 2014). The company had a dividend yield of 3.1 % compared to 1.59 % of the industry. The dividend yield represent 9.57% dividend growth compared to industry’s 7.58.

In the year 2013, the company had a return on assets of 7.21% as compared to the industrial return on assets of 16.01%. This means that the company recorded a return on assets that was below the industrial average. The company’s current ratio was 0.9 times that of the industry and had times 0.5 quick ratio to that of the industry. On the same year, the company had a dividend yield of 3.1 compared to that of the industry, which was 1.61. The pay-out ratio in the year 2013 was 60.64 and that of the industry was 17.64.  In terms of financial strength, the company is sound and strong. This is indicated by its quick and current ratios for the year 2013, which were 0.65 and 0.89 respectively. On the same year, the industrial current and quick ratios were 0.65 and 0.86 (Yahoo fiancé, 2014).

Overview of the P&G stock performance in NYSE

Share Performance

52 Week High                         $85.82

52 Week low                           $73.61

Beta Value                              0.47

Average Volume                     2,464,021

Share Highlights:

Accrued Shares                                   2,711.41 Billion

P/E Ratio                                 11.1810

Dividend Payout Ratio                       64%

Company Highlights:

Market Capitalization             $221.142 billion

Sales                                        $212.06 Billion

Profit                                       $11.321 Billion

Assets                                      $142.927 Billion

Financial Analysis

  Company Industry Sector
P/E Ratio (TTM) 22.02 52.59 34.18
P/E High – Last 5 Yrs. 19.95 19.37 29.73
P/E Low – Last 5 Yrs. 15.09 9.94 17.64
Beta 0.43 0.37 0.57
Price to Sales ratio (TTM) 2.61 5.86 5.03
Price to Book (MRQ) 3.24 1.80 32.01
Price to Tangible Book (MRQ) 2.21 35.81
Price to Cash Flow (TTM) 16.01 43.87 21.72
Price to Free Cash Flow (TTM) 80.92 16.46 126.69
% Owned Institutions

Source: Thomson Reuters (2014).

P&G Corporate Governance

Procter and Gamble Company is one of the companies that have very capable corporate governance. The management of the company, the board of directors and the shareholders work together. From the year 1887, P & G has a program that ensures that employees share in the profit of the company through stock acquisition (Scorecard, 2007). Making the employees the company’s long term investors is a move that aims at giving them an incentive to increase the company’s earnings. In order to reduce the conflict of interest between the management and the shareholders, the companies senior executive owns share of the company stock, which is valued five times the company’s CEO base salary.

To keep up with the spirit of good corporate governance, the company has a diligent, capable board of governors, maintains a comprehensive and strong internal control, and the company’s unit makes all the necessary disclosures (Dyer, Dalzell, & Olegario, 2008). The company also executes stewardship through maintenance of specific activities and plans that ensure all the employees have an understanding of their fiducially responsibility to the company’s shareholders. In order to reinforce the employee’s responsibilities the company has a worldwide business conduct which shows the board of governors and the management commitment in conducting the business of the company with high degree of ethics (P & G, 2014).

Part II

Financial News and Impacts of Procter & Gamble Stock

Statistics show a constant decline in the value of stocks of P&G traded in the NYSE. There have been various key factors in terms of financial and economic developments that directly affected the performance of P&G stocks in the past ten weeks commencing on December 16th 2013.

Week 1, Dec 16th – Dec 20th                                                                                       price: $77.65

“P&G EPS growth prospects”

The news regarding increased Earnings per Share (EPS) growth in 2014 attracted more investors to P&G stock and the share prices hit a high of $77.65 from a low of $76.83 the previous week. The EPS was expected to grow at a rate of 11% in the first quarter to 13% in the second quarter.

Week 2, 23rd – 27th Dec 2013                                                                                     price: $78.02

“Expansion in investments”

P&G’s new about declaration that it was going to start working on a $100 million plant on the onset of 2014 attracted more investors to the company. The facility is expected to start operation in 2015 and is expected to attract more profitability to the company. Due high demand of the company’s stocks, the share prices rose significantly.

Week 3, 30th Dec 2013 – 3rd January 2014                                                                 price: $78.91

“Declaration of quarterly dividend”

The key economic event that had a direct effect on P&G stocks was their declaration of quarterly dividend during this week. The company said that the dividend would be payable on 18th February 2014 or after that date. The divided was expected to earn $ 0.6015 per share and attracted massive volume trading of P&G stocks. The volume of shares traded rose from 8,223,578 shares to 11,673,888 shares after that declaration. The declaration of the quarterly dividends also attracted higher prices for the shares. The share prices also increased to a high of $78.91 from a low of $77.23 in the week (Yahoo Finance, 2014).

Week 4, 6th – 10th January 2014                                                                                  price: $79.23

“Payment of dividends”

As indicated in Thomson Reuters (2014), another economic event that had a direct impact on performance of P&G stocks was the payment of dividends of $ 0.6000 per share during week four of this analysis. The payment was made earlier than expected and this attracted a high volume stocks traded after that day. P&G traded 8,455,602 shares at $ 79.23 per share when the payment was made.

Week 5, 13th – 17th January                                                                                         price: $80.18.

“Extension of CEO’s contract”

The news regarding the extension of Nivea CEO’s contract by Nivea maker in a bid to revive sales also had an impact on P&G stocks. This was after the company’s chief executive turnaround strategy that led to highest sales growth ratio in the past five years. The company reported sales worth $8.4 billion in 2013 which was 7.2% growth since 2008. Since P&G was speculating to take over German Beiersdorf’s Nivea, its share price increased from $79.88 to $80.18.

Week 6, 20th – 24th January 2014                                                                                price: $82.13

“Positive prospects on sales growth”

The stock value of P&G appreciated further to a high of $82.13 after the company reaffirmed its prospects about share earnings of 2014 financial year on 24th January 2014. This is where the company held that they expected the sales growth to rise from 3% to 4% while the earnings per share were estimated to grow from 5% to 7%.  This financial development contributed to raising the value of the company’s stock.

Week 7, 27th – 31st January 2014                                                                                price: $78.24

“Drop in the stock prices”

During week seven there was financial news that financial stocks may be vulnerable following an earnings blitzkrieg. Following this speculation, there was a drop in the value of shares of P&G from $80.14 on that day to $79.23 on the following day and a further decline in the day after to $78.24. This was after the investors exercised a degree of risk aversion due to the uncertainty held in the market (Thomson Reuters, 2014).

Week 8, 3rd – 7th February 2014                                                                                  price: $79.11

“Discrepancy in estimated and actual EPS”

Comprehensive statistics drawn by Yahoo Finance (2014), shows that there was a shrink in the amount of P&G shares traded after the announcement of earnings per share on 4th February 2014. This is because there was a discrepancy in the analysts’ consensus of the company’s earnings per share which was estimated at $1.20 and the reported earnings per share which was $1.18. Although the amount of stocks traded fell, the value of the stock appreciated from $78.47 to $79.11. This indicates that the news resulted into an increase in the value of the stocks by 0.012 percent.

Week 9, 10th – 14th February 2014                                                                              price: $76.83

“Possible market pulse”

In the middle of week nine of this analysis on 12th February 2014, there was news about a market pulse. This information greatly affected the value of P&G’s shares which dropped significantly. The value of the shares dropped from $78.19 on 12th February to $77.89 on 13th February and dropped further to$76.83 the following day. This declining trend was observed till the end of week seven and the beginning of week eight.

Week 10, 17th – 21st February 2014                                                                            price: $76.06

“MRK.N buyout prospects”

On week nine of this analysis on 4th February, news emerged that P&G was a potential buyer of Merck & Co Inc (MRK.N) health consumer business. The healthcare business has got a wide variety of famous products such as Coppertone sunscreen and an allergy medicine known as Claritin among other famous products. This information brought about speculative motive into the industry. Investors reacted through high demand of the company’s shares a situation that raised their value. This speculation led to gradual trend in rise of P&G share prices. On the day of the news the market had a close of $76.06 (Thomson Reuters, 2014).

According to Lafley & Martin (2013), P&G stocks have shown a low volatility in the nature of its value. The stocks are not very sensitive to market conditions and only exhibit slight changes due economic or financial news. The general performance of P&G stocks has been good for the past ten weeks except from a few days of low performance. Statistics show that the general prices of the shares have been declining gradually. For example, week one showed pretty high prices of $81.04 while towards the end of week ten the prices are at a low of $77.29. P&G stock is a good asset to be taken into the portfolio. This is because the value of the stock is not adversely affected by the market conditions resulting from economic and financial news. Since it’s the beginning of the year a small degree of negative growth is not a threat to willing investors.  The graph below shows the stock performance of P&G for six months beginning November 2013.

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