I ask how safe is Procter & Gamble (NYSE: PG) because a certain school of value investment thought considers consumer staples are safer when interest rates rise.
To explain, the thinking is discretionary spending falls when interest rates rise but people still buy consumer staples. For instance, people still wash their clothes when interest rates are high.
Therefore, Procter & Gamble, or P&G, is the perfect consumer staple maker because it makes three of the five most popular laundry detergents in America. In fact, sales of two P&G detergents; Tide and Gain, were over five times greater than the fourth most popular detergent in 2018.
Procter & Gamble owns the Laundry Detergent business
In detail America’s favorite laundry soap is P&G’s Tide with US sales of $1.01775 billion in 2018, Statista calculates. Second, is Procter & Gamble’s Gain with $581.11 million in 2018 US sales.
Third is Tide Simply Clean and Fresh with $282.9 million in 2018 United States sales. Fourth is Arm & Hammer, a non-P&G product with US sales of $244.77 million 2018.
Therefore, Procter & Gamble owns the laundry detergent business in the United States. Moreover, six of the top 10 US laundry detergents are P&G products, Statista reports.
Thus, Procter & Gamble is the perfect company to test the consumer staple, stability thesis. Interestingly, P&G’s financial numbers provide some verification for that that thesis.
Is Procter & Gamble a Stable Company?
Procter & Gamble is a stable company because its revenue has hovered around $16 billion to $17 billion for the past nine quarters.
Specifically, P&G reports revenues $16.856 billion for 4th Quarter 2016, $7.395 billion for 4th Quarter 2017, and $17.438 billion for 4th Quarter 2018. Hence, Procter & Gamble’s revenues rose slightly, in a period when the Federal Reserve Open Market Committee raised the policy interest rate from 0.5% in 2015 to 0.75% in 2016, to 1.5% in 2017, to 2.2% to 2.5% in 2018, and 2.5% in 2019, Focus-Economics reports.
However, P&G’s gross profit fell during that profit. To explain, P&G reports a gross profit of $8.558 billion for 4th Quarter 2016, $8.686 billion in 4th Quarter 2017, and $8.519 billion in 4th Quarter 2018. Hence, Procter & Gamble is making slightly less money despite higher interest rates.
How Amazon and Walmart threaten P&G’s future
My guess, is P&G profits are lower because gigantic discounters like Walmart (NASDAQ: WMT), Amazon (NASDAQ: AMZN), and Kroger (NYSE: KR) force it to keep prices low. Discount giants force Procter & Gamble to keep prices low because they control much of the market.
For instance, Walmart controlled 26% of the US grocery market in 2017, Statista estimates. Meanwhile, Amazon had a 33.7% of the US e-commerce market in 2018, Digital Commerce 360 calculates. Hence, both Amazon and Walmart are able to force P&G to cut prices to get access to their customers.
Significantly, Kroger owns the grocery market in some areas. Specifically Kroger claims to have a 60% of the grocery market in Cincinnati, The Business Courier reports. Thus P&G has to keep Kroger happy to get access to many markets.
How Amazon and Kroger could squeeze P&G out of Markets
Moreover, Kroger and the Ocado Group PLC (LSE: OCDO) are building robotic fulfillment centers that could dominate grocery delivery in some markets. To explain, the fulfillment centers will use swarms of robots to pull and pack grocery orders. Then services like Instacart will deliver the groceries.
In addition, Amazon is testing a two-hour Prime Now Grocery delivery option in markets like Los Angeles. Thus, delivery could make Procter & Gamble more dependent on Big Retail than ever.
Under these conditions, retailers like Amazon, Kroger, and Walmart could be in a position to squeeze P&G out of some markets. For instance, Kroger could offer free delivery on its house brands, Persil, or Arm & Hammer as a loss-leader.
Is Procter & Gamble a Good Investment?
Despite these perils, I consider Procter & Gamble a good investment because of a realistic price and a superb dividend.
I think Mr. Market correctly priced P&G at $103.35 a share on 4 April 2019. In addition, Procter & Gamble paid a 71.7₵ dividend on February 15, 2019. Plus that dividend grew by 2.7₵ in 2018 rising from 69₵ in February 2018 to 71.7₵ in August 2018.
Impressively, the dividend will probably grow in 2019 because Dividends.com credits Procter & Gamble with 62 years of dividend growth. In addition, Procter & Gamble shareholders enjoyed a payout ratio of 64.9%, an annualized payout of $2.47 and a dividend yield of 2.78% on 4 April 2019.
Procter & Gamble has a history of safety
Thus, P&G’s history makes it an excellent long-term income. For example, its dividend kept growing through the craziness of the 1960s, the stagflation of the 1970s, the recession of the 1980s, the rise of Walmart in the 1980s and 1990s, and the Great Economic Meltdown of 2008.
Hence, Procter & Gamble partially proves the thesis that consumer products staples are safe investments in chaotic times. However, recent history proves technology and market changes can destroy dominant brands quickly.
For example, once potent brands like Sears, Nokia, BlackBerry and General Motors have crumbled in the last two decades. In addition, some powerful consumer brands like McDonald’s (NYSE: MCD) are struggling to keep market share.
Will E-Commerce Save Procter & Gamble?
The greatest threat to P&G is changing shopping habits driven by technology. Specifically, the growing ease, convenience, and speed of e-commerce and delivery.
However, Procter & Gamble’s strong brands like Tide give it an edge in e-commerce. To explain, lazy consumers who order laundry detergent online will order the brand they recognize and trust first. Thus, those customers will order Tide.
Furthermore, P&G could make more money by using e-commerce to sell directly to customers. For instance, an exclusive deal with Instacart to ship Tide directly to your house. Thus, Procter & Gamble could make more money by eliminating brick and mortar retailers.
In the final analysis, Procter & Gamble is a strong company that will survive and make money. Therefore, P&G’s dividend will probably continue for many years.