How High Will Procter & Gamble Stock Go?

Shares of consumer staples giant Procter & Gamble (PG) have hit a 52-week high recently despite a narrowed EPS outlook for the year, so does the stock still have room to run?

Procter & Gamble (NYSE:PG) is known for offering stability and a steady income stream through generous dividends. The company is one of the most recognized in the consumer health and personal care space, with a solid portfolio of trusted brands.

Plus, Procter & Gamble’s dividend payments for 133 consecutive years and increasing the same for 67 straight years make it an enticing stock for income investors. Quite reasonably so, as its forward annual dividend of $3.76 per share yields 2.4%.

The company returned $3.30 billion of cash to shareholders in its most recent quarter through approximately $2.30 billion of dividend payments and $1 billion of share repurchases. This reaffirms its ability to generate cash and commitment to rewarding shareholders.

P&G is a giant in the consumer staples sector with significant pricing power and dominant market share, which are not likely to be ceded anytime soon. Its industry-leading portfolio helps generate steady cash flows, which, in turn, fund dividend payouts and share repurchases.

On the back of its resilient business model, Procter & Gamble has enjoyed moderate but steady growth in revenues and earnings over the past few years.

The underlying strength in the company’s fundamentals has helped P&G stock gain more than 60% and 100% over the past 5 and 10 years, respectively. Now, with a market capitalization of $376 billion, Procter & Gamble is among the highest-valued companies, so what does the future hold?

Stable Demand Despite Inflationary Pressures

The consumer goods maker closed its fiscal second quarter of 2024 profitable. As inflation eased, input costs were reduced though consumers still experienced higher prices that benefited the company.

Procter & Gamble raised prices across its divisions during the quarter, which caused volumes to fall overall, but not too much. As a result, the company generated organic sales growth of 4% during the quarter and boosted the top line by 3% to $21.44 billion.

Moreover, the company’s gross margin improved by 520 basis points to 52.7%, while its core operating margin for the quarter increased by 400 basis points compared to the year-ago period. Profit margins were better than analysts had expected, especially in the European markets.

The demand for daily-use products, primarily grooming and home care, remained strong, with a 4% rise in overall volumes in the United States and 3% in Europe.

However, earnings declined 12% year-over-year to $3.47 billion, or $1.40 per share, which can be attributed to a $1.3 billion pre-tax non-cash impairment charge related to the company’s 2005 acquisition of Gillette. However, core net earnings per share came in at $1.84, an increase of 16% from the prior-year quarter, driven by the rise in net sales and core operating margin.

For the quarter, the company’s operating cash flow stood at $5.1 billion, while its adjusted free cash flow productivity was 95%.

Guidance Still Positive

While the company reiterated its sales growth guidance and raised its core net EPS growth guidance for fiscal 2024, it narrowed the net EPS growth outlook. Management noted that the impairment of Gillette’s intangible asset value and its two-year restructuring program took its toll.

Still, they expect sales growth for the year to be 2-4% and organic sales to be 4-5%, unchanged versus previous guidance. Impressively, it raised the year-over-year core net EPS growth projection for the year to 8-9% from 6-9% predicted earlier.

Moreover, the company guided an unchanged adjusted free cash flow productivity of 90%. It aims to pay more than $9 billion in dividends and repurchase $5-$6 billion in shares.

The overall positive guidance and ability to maintain healthy margins during the second quarter more than offset the narrowed net EPS growth forecast. This is evidenced by an approximately 5% increase in the company’s share price since the second quarter earnings release.

How High Will Procter & Gamble Stock Go?

According to the consensus of 25 analysts, Procter & Gamble stock can rise by 6.7% to fair value of $168.99 over the next year.

Shares of P&G have rallied by more than 11% over the past three months to hit their 52-week high recently. The stock rally resulted in a premium valuation. Its non-GAAP trailing-12-month price-to-earnings (P/E) ratio of 25x is higher than most of its industry peers and almost near its 5-year average.

Value-focused investors may find this valuation expensive and may want to wait for a better entry point. However, the company’s long history of success and favorable outlook justify the premium, and there could be further room for appreciation. There is also reason to be optimistic as the company grows organically or with brand acquisitions bolstering its portfolio and cash flows.

While the average analyst price target of $168.20 indicates a meager upside potential of 5%, 12 out of 21 analysts suggested buying the stock and 9 recommend holding it.

Is It Wise to Own Procter & Gamble Stock?

In January, U.S. consumer sentiment hit its highest level in over two years, likely reflecting consumers acknowledging the easing of inflationary pressure and the overall economic improvement. Moreover, retail sales rose in December amid holiday spending. However, geopolitical issues and instability in the job market might hamper consumer spending.

Nonetheless, P&G offers a wide range of essential items that consumers can’t compromise on even when the economy goes south. Moreover, the company’s global reach allows it to take advantage of the favorable dynamics of emerging markets.

Notably, the ability to generate stable free cash flow and ensure a dependable passive income makes for a compelling opportunity. Despite being a bit expensive, shareholder-friendly policies and brand positioning make P&G a wise addition to a long-term portfolio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.