Procter and Gamble Stock: The Next Twenty Years

The best unexpected perk of regularly writing about stock investments as a blogging hobby is that some incredibly talented, hard-working, and driven audience that is dead serious about personal improvement in their own lives. Over time, it has kind of become a responsibility because there are some readers who are sitting on some very real financial capital and are going through the education process of figuring out how to get the best outcome for what they have. Among these readers is a group of Procter and Gamble retirees that are sitting on large chunks of P&G stock that has compounded at a fairly nice clip throughout their working careers.

When I invest, the most important consideration is that I want to avoid the possibility of what Charlie Munger has called “going back to go” using an analogy from the Monopoly. By choosing to invest rather than consume, I am impliedly stating “I would rather have some multiple of x in the future than x today”. I don’t want that x to turn 0. If I am going to collect a dividend every 90 or so days, and reinvest it into more shares, and repeat the process year after year, the underlying asset better have sufficient endurability that there will be something leftover for me at the end of the reinvesting period.When I look at the stable of brands that are collectively owned by Procter & Gamble, it is breathtaking. You have the Tide brand, which controls 55% of the domestic liquid detergent market (it controls 14.3% of the global detergent market). It is a brand that has stood the test of time. It has enough brand strength that Amazon, Costco, and Wal-Mart have been effectively able to steal its market share even while offering significantly lower competitor pricing. Generic detergent options cost sometimes only half as much as Tide, but over half of Americans still buy Tide.

To me, Tide is the case study of a sustainable brand. It can withstand deep competitive forces by the strongest retailers in the world launching generic products to steal its market share, but they cannot do so even while Tide continues to charge a substantial markup for its product. This is real-world economics. If you go to Walmart.com, you can buy 100 ounces of Tide for $11.97. You can also buy 100 ounces of Great Value Clean Laundry Detergent for $6.17. Both Tide and Great Value enjoy incredibly low scales of production so the costs of the product creation are similar, but customers are willing to pay twice as much for Tide as a generic competitor. That is all $5.80 in additional profit per unit that flows to Procter & Gamble shareholders, year after year since 1946.

And where have all those Tide profits gone? To pay dividends to shareholders, plus build and/or acquire the following billion-dollar brands:

  1. Always menstrual hygiene products;
  2. Ariel laundry detergent;
  3. Bounty paper towels, sold in the United States and Canada;
  4. Charmin bathroom tissue and moist towelettes;
  5. Crest toothpaste;
  6. Dawn dishwashing;
  7. Downy fabric softener and dryer sheets;
  8. Fairy washing up liquid;
  9. Febreze odor eliminator;
  10. Gain laundry detergents, liquid fabric softener, dryer sheets and dish washing liquid;
  11. Gillette razors, shaving soap, shaving cream, body wash, shampoo, deodorant and anti-perspirant;
  12. Head & Shoulders shampoo;
  13. Olay personal and beauty products;
  14. Oral-B inter-dental products;
  15. Pampers & Pampers Kandoo and Luvs disposable diapers and moist towelettes;
  16. Pantene haircare products;
  17. SK-II beauty products;
  18. Tide laundry detergents and products;
  19. Vicks cough and cold products.

The company is a financial fortress. Buying Procter & Gamble stock has the highest “earnings quality” of just about any company in the world. There are only maybe two or three dozen companies in existence out of the 15,000 publicly traded companies in the world that I would consider to be of equal caliber in the event of a recession or adverse economic condition. During the harsh recession years in the early 1960s, 1974-1974, and 2008-2009, Procter & Gamble remained profitable and saw its profits fall by no more than 10% during the worst economic events of the past half-century. If I had to take a fifty-year slumber and guess which companies are most likely to still be around 2070 or some other far off date, Procter & Gamble would be on the list.

And the compelling part? It’s been returning 40-70% of its cash to shareholders every year since 1963, building up a consumer products empire even while most of the profits have been sent out to shareholders. Going back to 1990, a $1,000 investment (about $3,200 today) in Procter & Gamble would have increased 19x fold. For someone who collected the dividends, it would have been an additional 4x added—as in, every $1 invested into Procter & Gamble stock in 1990 would be $19 in PG stock and $4 in dividends for $23 in total value. For someone who reinvested those dividends at each turn, the results would be a 31x increase in value—your $1 in PG stock would be $31 today due to the rise of Procter & Gamble stock plus the additional shares acquired through dividends.

So what is an ideal profile for someone suited for investing in Procter & Gamble stock? I would say it is someone that has a fair amount (in excess of $1,500+) to invest in common stocks every month and is trying to “inventory” profits from their own business or labor by getting some “reasonable growth” with the lowest possibility of downside risk over time. I would say that someone who enrolls in the Procter and Gamble direct stock purchase plan and invests $300 per month into it for the next twenty years will reap returns of about 8% to 10% over that time frame and would probably end up with $200,000-$250,000 in PG shares pumping out $6,000-$9,000 in annual dividends.

And you know what’s interesting? For most of Procter & Gamble’s history as a publicly traded company, it has traded between 18-22x earnings. In fact, for 21 out of the past 28 years, the stock valuation has been either 20x earnings or 21x earnings. And the earnings per share have grown at 7.2% and the dividend yield has almost always set between 2.3% and 3.3%. Any time you buy it, it seems that you are primed for 9.5% to 10.5% total returns ahead.

When you look at major trust funds, institutional funds such as charities or pension plans, the portfolio inevitably ends up stuffed with stocks like Coca-Cola, Johnson & Johnson, ExxonMobil, Nestle, and Procter & Gamble. This happens because there aren’t that many companies in the world where you have the certainty to trust the capital to some “mission-critical” goal such as having money in old age or funding a particular charity indefinitely into the future.

But scroll up top and take a look at those brands owned by Procter & Gamble. Each of those could be a publicly traded stock in its own right! I’d be perfectly content owning Oral-B toothbrushes or Febreze odor eliminators in an investment portfolio for decades. But at Procter & Gamble, it’s just one piece of the foundation that is essentially a combination of two dozen enterprises throwing off torrents of cash. It’s one of the only opportunities in the stock market where the terms are: “You can buy this asset today, hold it for the rest of your life, and you’ll get 9-11% annual returns.”

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