Monday, July 16, 2012

Ackman to P&G: Youi're Not A Utility

Last month I wrote a post about Procter & Gamble.

After being a growth stock for much of the 1990's, the stock of P&G has lately acted more like a regulated utility stock than a global consumer products company.

For example, over the last 5 years, while P&G's stock has been essentially flat-lined (blue line below), Colgate Palmolive (red line) is up more than +50%:

Here's what I wrote last month:

But here's where I think that P&G comes out more favorably than utilities:  The relative valuation of utility stocks versus the S&P is at its historic high.  The group trades at a +20% premium to the market which seems to be to be pretty aggressive given the nature of the utility business.

P&G, on the other hand, is trading below its historic valuation versus the broader market over the past 10 years.  True, it traded lower - in 2009 - but for the most part investors were historically willing to pay a higher premium for P&G's combination of high dividends and consistent (albeit slowing) business results.

The chart I have posted above suggests that if we are truly in a low market growth environment - which seems likely - that high dividend, low expectation stocks like P&G are worth a look.

Turns out that activist investor Bill Ackman of Pershing Square Capital Management is not content to let P&G languish.

Last week Ackman made a $2 billion investment in P&G, calling on management to either make good on its promises to reduce costs and increase growth rates, or consider more radical changes

The maker of Tide, Pampers and Crest is under pressure from investors frustrated after Chief Executive Officer Robert McDonald reduced P&G’s profit forecasts three times this year. Investor Bill Ackman last week bought into the company with what he called his biggest initial stake ever and is likely to push for a management change and large asset sales, said another person familiar with the matter.

It will be interesting to see how this all plays out.  The market capitalization of P&G popped by $11 billion last week, thanks to Ackman's investment, and now stands at $188 billion.  Normally companies this size are largely immune to outside pressure, but apparently not so in this case.

And, yes, I would still be a buyer of P&G stock for conservative portfolios.