Spite isn’t a reason I often cite when advising my Cabot Undervalued Stocks Advisor subscribers to sell a stock. But if I personally owned Procter & Gamble stock right now, it would at least be part of the reason.
In recent days, Procter & Gamble (PG), the household products giant, debuted an ad for Gillette razors that purports to attack bad male behavior. Do some men behave badly? Absolutely. Do some women behave badly? Absolutely.
What is the point of the advertisement? Is Gillette trying to shame men into buying Gillette’s products? Is that akin to shaming drunk drivers into buying Subaru vehicles? Or shaming poor students into hiring Sylvan Learning to increase their math scores?
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If a company tried to chastise ME through advertising, telling me that I don’t shave my legs often enough, or that I’m woefully lax on sending greeting cards, I’d think the company had an absurd approach to acquiring my patronage. But if they laid on enough guilt for me to actually take action and begin buying more greeting cards, I’d probably foster some resentment toward the advertiser, and I’d purchase my greeting cards from a competitor. On purpose. Just to “show them”!
Now that we know that Procter & Gamble is the parent company of Gillette, let’s see which other famous products Procter & Gamble purveys. The company’s famous brands include Bounty, Cascade, Crest, Downy, Gillette, Joy, Olay, Pampers, Pantene, Tampax, Tide, Vicks and more. Those products are sold globally, and the company is expected to sell about $67 billion dollars worth of household goods this year. Wow!
So the next question for stock investors becomes, “Is PG a good stock to own?”
3 Reasons to Sell Procter & Gamble Stock
Well, the answer depends on what you’re looking for in a stock, and how much risk you’re willing to take on, keeping in mind that sometimes stock market risk represents lost opportunity, and not just day-to-day share price volatility.
Procter & Gamble is expected to deliver earnings per share (EPS) growth of 4.5% and 7.3% in fiscal 2019 and 2020 (June year end). So the good news is that profits are growing. (Public companies can’t generally hope for their share prices to grow if their profits are not growing.) However, Procter & Gamble stock doesn’t “make the cut” for me because I prefer to invest in stocks that are delivering double-digit annual earnings growth, on the theory that stronger earnings growth will translate into stronger share price growth. And face it: We buy stocks so that the share price will grow, so let’s remain focused on our potential capital gains, and not get all emotional about a popular, exciting or irritating ad campaign.
Another component of a stock’s potential profitability is the dividend. Shareholders of PG stock receive a quarterly dividend payout of $0.7172, totaling $2.87 per year. The current dividend yield is 3.2%, and the company has a history of announcing a small, annual dividend increase in April. That’s a nice benefit to owning PG shares, especially considering that some stocks don’t pay any dividend at all.
A third important number for stock investors is the price/earnings ratio (P/E), a valuation measure. Ideally, I like to see the P/E be well below the earnings growth rate. But in the case of Procter & Gamble stock, the 2019 P/E is 20.6. Ouch!
Better Options than PG
The stock recently traded at all-time highs, growing at a 9% compounded rate during the last nine years, or 6% per year over the last six years. And of course, shareholders received the dividend, too. But if you’re going to take on the extra risk associated with owning stocks that have high price/earnings ratios, why not buy stocks that also have strong earnings growth, like Netflix (NFLX), which is expected to see profits grow another 54% in 2019? Netflix stock grew more than 50% per year for the last six years!
Maybe you’d like a stock with strong earnings growth and a low P/E and a higher dividend yield than PG? Delta Air Lines (DAL) is expected to see profits grow 19% in 2019, the current yield is 2.9%, and the stock rose 28% annually over the last six years. Delta’s P/E is just 7.3, about one-third the P/E of Procter & Gamble stock.
If a rich relative passed away and bequeathed shares of PG to me, I would sell those shares and buy NFLX or DAL, depending on whether I was focused on earnings growth or valuation. I simply wouldn’t see the wisdom in owning PG. And I’d probably get some satisfaction over selling the stock, because I’m not the target market for victim advertising.
Life’s difficult for everybody. I relate to people who rise above their challenges with grace, not to people who act superior to entire swaths of the citizenry.
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