January 26, 2022

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Fit And Go Forward

Why Procter & Gamble Is a Retiree’s Dream Stock

No single stock is perfect in every possible way. Dividend payments made to shareholders could be instead be invested in growth. Companies that do exceedingly well in periods of economic strength usually struggle during an economic contraction. Picking stocks is ultimately about managing trade-offs.

If there was only one near-perfect pick for retirees, however, it would arguably be Procter & Gamble (NYSE:PG).

Older couple napping on couch

Image source: Getty Images.

Not ready at the time

Anyone reading this likely knows Procter & Gamble is the name behind popular consumer goods such as Tide laundry detergent and Bounty paper towels. What they may not fully appreciate is the full breadth and depth of P&G’s portfolio. Crest toothpaste, Pepto-Bismol, Febreze, Old Spice, Gillette, and Pampers are also part of the Procter family.

These are all goods people constantly consume and replenish, often buying the same brand over and over again.

Those who know Procter & Gamble’s recent history also know, however, that the company didn’t quite keep its finger on the pulse of consumerism early on in the 21st century. The world wide web democratized pricing, promoting, and eventually, purchasing, giving rise to niche competitors that took a competitive toll. Dollar Shave Club and Harry’s, for example, ate into Gillette’s market share by circumventing the retailers that Procter & Gamble continued to cultivate after it acquired the Gillette brand in 2005.

It was a microcosm of the fact that P&G just wasn’t equipped for the new normal that took shape in the early 2000s. Perhaps it was too big and too stuck in its old pre-internet ways for its own good.

Underscoring this lack of readiness was the company’s decision to sell a big part of its beauty business to Coty in 2016, rather than attempt to revive those products’ sales. Some of those brands — like Clairol and Wella — had only been brought into the Procter fold a few years prior, and seemingly never got the shot or guidance they deserved.

New and improved

Much has changed in just the past few years, particularly since David Taylor took the helm as CEO in 2015. Chief among the changes he’s driven is a relatively new affinity for consumer data, and using that data to connect with consumers on the web.

He referred to it as propensity marketing a little over a year ago, simplifying the company’s newly learned capacity to “reach the right people at the right time at the right place.” That approach utilizes the internet a whole lot more, and other forms of marketing a whole lot less. In conjunction with the overhaul of Procter’s promotional program, Taylor culled some of the ad agencies it had worked with in the past too, en route to a target savings of $2 billion per year. Taylor touts the company’s “stronger media delivery [and] stronger programs at lower cost.” The company’s even buying its way into new digital markets. In January, it acquired women’s body care brand Billie, which is a direct-to-consumer brand that can make good use of P&G’s new data-driven marketing program.

The new formula seems to be working. Although boosted a bit by coronavirus shutdowns, last quarter’s e-commerce revenue grew a stunning 50% year over year. Online sales now account for around 12% of total revenue, basically doubling e-commerce’s effect on the top line from a couple of years ago.

What didn’t change was P&G’s interest in innovation, although under Taylor the company’s been able to do more of it. In something of a shakeup of the company’s corporate culture, he’s encouraged risks without necessarily punishing failure. New product concepts unveiled at January’s Consumer Electronics Show range from the curious — like Gillette’s heated razor — to the downright bizarre, like a robot that delivers toilet paper.

Not every innovation will find its way into stores, but clearly the company is considering all possibilities.

Connecting the dots

As for how this matters to retirees, Procter & Gamble still offers consumables to shoppers familiar with its brands. What’s changed for the better is the company’s ability to connect with those consumers in a way that’s most relevant to them…a key business component P&G didn’t even appear to know it was overlooking before Taylor took over.

With all the right levers finally in place, Procter has quietly moved back into a position of strength within the consumer staples market. As fellow Fool Daniel Sparks noted last month, new buying habits formed because of the COVID-19 pandemic look like they’re going to stick around even once the contagion is in the rearview mirror.

Of course, it would be short-sighted to not look past the fact that the company’s highly marketable product base will not only help pay P&G’s dividend, but allow the organization to start improving its payout growth. The company may have upped its payout every year for the past 64 years, but the increases haven’t exactly been thrilling of late compared to earnings progress.

Procter & Gamble (PG) revenue and earnings should start to significantly outpace dividend growth.

Data source: Thomson Reuters Eikon. Chart by author.

Bottom line: Procter & Gamble offers a healthy balance of almost everything a retiree could want in a stock. That’s recession-resistant results, steady income that should outpace inflation, a way to participate in the consumer goods market’s rising tide, and a chance to participate in any market share gains the company may achieve in the near future. It’s an attractive mix of risk and reward that’s tough to find with a lot of other stocks.

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