Is Procter & Gamble in Trouble?

There are signs of trouble at Procter & Gamble (NYSE: PG). The consumer products giant is raising prices despite growing revenues.

P&G is planning to raise prices on several popular products including Luvs diapers, Bounty and Charmin Towels, and Puffs tissue, Chief Financial Officer Jon Moeller revealed. Pampers prices will increase by 4% while paper product prices will rise by 5%, WCPO Cincinnati reported.

Prices are going up because of rising commodity costs. Moeller blamed the strong US dollar which makes paper more expensive.

P&G makes diapers and paper towels from imported wood pulp. Wood pulp comes from countries like Canada with lower-valued currencies.

Why Diaper Prices are increasing

Management has scheduled the Pamper price increase for August, paper towel prices will rise in October, and Puffs costs should increase in February 2019. Moeller foresaw no other price increases.

A more likely reason for the price increase is a drop in diaper sales. American diaper sales fell by 4.2% in 2017 and should fall by 5.8% in 2018, Nielsen estimated. Diaper demand is falling because of a falling birthrate.

The US birth rate fell by 2% between 2016 and 2018, the Centers for Disease Control and Prevention reported. Obviously, a falling birthrate means fewer babies and a lower demand for diapers.

Prices for one P&G product, Luvs diapers will fall 7% to 8%. Moeller did not reveal why Luvs prices are falling while Pampers costs are growing.

P&G Revenue is growing

In a fascinating twist, the price increases are coming when Procter & Gamble’s revenues are growing. P&G reported a year-to-year revenue growth rate of 2.64% for 2nd Quarter 2018.

Quarterly revenues at P&G were $16.079 billion in June 2017 and $16.503 billion a year later. Unfortunately, quarterly income and profits were down.

Procter & Gamble reported a net income of $2.215 billion in June 2017 and $1.891 billion in June 2018. The operation income fell from $2.949 billion in June 2017 to $2.677 billion in June 2017. Gross profit dropped from $7.780 billion in 2nd Quarter 2017 to $7.474 billion a year later.

Therefore, the financial numbers justify the price increases. Procter & Gamble is making less money than last year.

Is Procter & Gamble making Money?

These investors should concern investors by raising questions about P&G’s cash flow.

The good news is that Procter & Gamble still generates a lot of cash. P&G reported a free cash flow of $3.292 billion and an operating cash flow of $4.199 billion on June 30, 2018.

Importantly, those cash flows increased since last year. Procter & Gamble reported a free cash flow of $2.499 billion and an operating cash flow of $3.688 billion on June 30, 2018.

P&G is generating more cash than it did last year. Unfortunately, operating costs are up because of higher commodity prices.

The price increases for higher-end products like Pampers are a prudent effort to offset growing expenses. Price cuts for Luvs are a smart strategy to attract lower-end customers.

Despite the growing costs, Procter & Gamble has a lot of money in the bank. P&G reported holding $2.569 billion in cash and equivalents and $11.850 billion and short-term investments on June 30, 2018.

61 years of Dividend Growth at P&G

Therefore, Procter & Gamble is a healthy company. That health will make P&G’s dividend more attractive.

Procter & Gamble scheduled a 71.7¢ dividend payout for August 15, 2018. That dividend is up from 69¢ in 2017 and 66.9¢ in 2016.

Impressively, P&G has been paying a steadily growing dividend over 60¢ for the past five years. Back on August 18, 2013, Procter & Gamble shareholders received a 60.1¢ dividend. That dividend is paid every quarter.

That dividend growth led to a dividend yield of 3.52%, an annualized payout of $2.87 a share, and a payout ratio of 64.9% on August 10, 2018. Best of all, Procter & Gamble has experienced 61 straight years of dividend growth. Its dividend has been growing since President Dwight D. Eisenhower (R-Kansas) was in the White House.

How safe is Procter & Gamble’s dividend?

Skeptics will wonder how safe P&G’s dividend is. The retail and consumer landscape is changing beyond recognition.

The rise of Amazon (NASDAQ: AMZN) is devastating brick & mortar stores, private label brands are wreaking havoc with consumer loyalty, and income inequality is undermining the middle class. The retail environment that Procter & Gamble thrived in for over a century is dying.

Despite those change P&G is still the king in the laundry aisle. Four of the five best-selling laundry detergents in America in 2017 were Procter & Gamble brands. Tide was number one, Gain was number two, the low-end Tide Simply Clean and Fresh was number three, and Tide Plus a Touch of Downey was number five, Statista calculated.

P&G dominates the diaper aisle’ it controlled 43% of America’s diaper market in 2017, CNN Money calculated. Just one brand, Pampers brought in $8 billion in revenue in 2017.

Is Amazon a Threat to P&G?

There are clouds upon the horizon for P&G, Amazon launched a private label line of diapers called Mama Bear in July 2018. Mama Bear is cheaper than Pampers, USA Today reported.

This is a threat to Procter & Gamble because Mama Bear targets younger moms that do not watch traditional television. Those mothers are unlikely to see Pampers’ costly TV commercials.

Obvious menaces to P&G would be Amazon brand laundry detergent and toothpaste. A major threat will be people who do all their shopping online or through Amazon Dash Buttons. Those individuals will be more likely to purchase the Amazon brand.

How P&G can compete with Amazon

There are ways that Procter & Gamble can counter Amazon. An obvious one is to sell direct to customers through solutions such as Instacart. For example, have Instacart deliver Tide or Pampers directly to consumers from P&G fulfillment centers.

Another is to work closely with retailers like Kroger (NYSE: KR). Kroger and the British logistics technology provider Ocado Group PLC (LON: OCDO) have teamed up to develop automated grocery fulfillment centers across the United States.

Kroger owns 6% of Ocado, which develops robotics logistics solutions for retail. Ocado operates robotic fulfillment centers in the UK. It is testing self-driving grocery delivery vehicles in London.

A logical solution for P&G would be to sell its products directly through Ocado or Kroger fulfilment centers. Those centers would supply Tide or Pampers to services like Instacart which would deliver them to customers. Kroger has a nationwide delivery arrangement with Instacart.

P&G has laid the groundwork for such sales with P&G Shop a direct to consumer subscription service for many of its brands. If P&G Shop combined with a delivery service like Instacart it might enable Procter & Gamble to do an end run around Amazon. Another logical use for P&G Shop is selling directly through Amazon or Walmart.com

Such opportunities demonstrate that P&G can remain competitive in the 21st Century with smart management. Therefore, it should remain a strong value investment and dividend stock for the foreseeable future.

Procter & Gamble (NYSE: PG) was definitely a value investment at $81.31 a share on August 14, 2018. Bargain hunters should inspect P&G.