After yesterday’s market close, we published our newest in-depth research report on consumer products giant, Procter & Gamble, in the form of an IOI Chartbook 
.
The ChartBook offers a review of P&G’s operations and walks through each of P&G’s key valuation drivers. Like all of our ChartBook reports, it leads off with the three things an owner should know about P&G.
- PG is making material improvements to its operating performance through divestiture of non-core brands, work-force reductions, and supply chain restructuring.
There is no doubt that the restructuring projects and focus on cash returns have positively impacted PG’s financial performance. The company has delivered a step change in Owners’ Cash Profit (OCP) margins over the last 2 years. If this step change proves durable, it will be the third one in P&G’s recent history and will represent a quadrupling of the efficiency with which P&G converts revenues to profits since the 1990s.
- P&G managers claim that the company will return $70Bn to shareholders over the next 4 years, but actual shareholder benefits will likely be less.
“Seventy billion dollars” is a big number. We think it is meant to be a shock-and-awe figure to boost stakeholder confidence in the company’s new strategic direction; however, the $25 billion of this figure slated to be in the form of stock repurchases is suspect to us. Over the last three years, P&G has bought back 214 million shares at a total cost of $16.6 billion. At this rate, the four-year buyback total would be over $22 billion, so the $25 billion figure means increasing buyback activity by $1 billion per year.
The important thing to realize, however, is that simultaneous to its buy-back programs, it has also issued 180 million shares in executive compensation. From a shareholder’s perspective, this is akin to taking 2.14 steps forward and 1.80 steps back. The increased share repurchase may marginally aid shareholders as long as it is not made simultaneous to increasing share compensation to employees.
The remainder of P&G’s shock-and-awe shareholder package will be in the form of dividends and share retirements. We do not anticipate a material change to P&G dividend policy and the retirements are related to transactions already announced.
- P&G has the potential to increase operational performance from here, but these potential improvements have largely been factored into the current stock price.
The increase in profitability combined with slightly higher activity designed to boost shareholder returns is a good sign. However, from the vantage point of our valuation methodology, it looks like the market has already acted on this information. Six of our eight valuation scenarios lie at a price below the present market price and the ultimate best-case valuation scenario for P&G would represent the company firing on all cylinders in a way it never has before.
Continue Reading the IOI Chartbook on P&G.