Procter & Gamble (NYSE:PG) stock is one of the quintessential defensive plays, but it stock hasn’t exactly been a safe harbor recently. Shares have dropped compared to that of the broad market. Now, there’s a good reason for this relatively large move lower.
As many investors buy this stock for the dividend, the latest news regarding interest rate policies has weighed on shares a lot more strongly than with other major stocks.
In addition, there are rising concerns as to whether this more than century-old company can maintain its current level of earnings growth.
With this in mind, after many years of solid performance, do middling returns lie ahead for P&G? Not so fast!
As I’ll explain below, things have not permanently turned for the worst for this “Dividend King.”
PG Stock and Its Recent Poor Performance
Compare Procter & Gamble’s recent performance against recent headlines, and you may think that it’s a company-specific factor, not something macro-related, that’s driving this stock’s latest, relatively large price decline.
About a month ago, advocates filed a class action lawsuit against P&G as well as against other makers of over-the-counter cold remedies which contain the drug phenylephrine.
The Food and Drug Administration recently stated that this drug is ineffective, and that P&G and its peers were well aware of this fact.
All bets are off whether this litigation ends up going anywhere, but cold remedy sales make up a tiny portion of P&G’s overall sales.
The PG stock sell-off last month didn’t begin until Sept. 21, days after the cold remedy controversy emerged.
Sept. 21 was of course the day the Federal Reserve signaled that it intended to keep interest rates at elevated levels through 2024, and perhaps into 2025 as well.
With the prospect of interest rates staying high for longer than initially expected, investors have, and are continuing to, question whether P&G’s valuation is justified.
Growth and Valuation Worries Are Overdone
Alongside high interest rates, the related rising chances of a 2024 recession are also weighing on PG stock.
P&G has fared quite well, when it comes to inflationary pressures. The company so far has been successful in keeping up with inflation (and then some) by raising prices.
Sales volume has declined, but these price hikes have more than made up for it. Last quarter, for example, the company reported a 5% year-over-year jump in revenue, and a 13% increase in profitability.
However, based on its latest outlook, the company has conceded that this price hike gambit could be less effective.
The market is also concerned the resultant effect on consumer spending may mean even less impressive levels of growth. I can understand why these growth and valuation worries are spreading. Still, I believe them to be an overreaction.
While shares could remain under pressure as uncertainties continue, it’s doubtful this blue-chip consumer staple will soon move down to a heavily discounted valuation.
Going forward, don’t assume underwhelming total returns are in this stock’s future.
The Verdict
PG shares have long been a great opportunity for risk-averse investors seeking steady returns over a long time frame. Despite recent concerns, this hasn’t changed.
Again, while the stock could experience some further multiple compression in the near-term, even if near-zero interest rates fail to return, this blue-chip can sustain an earnings multiple near current levels.
In the mid-2000s, when interest rates were as high as they are today, P&G traded for around 20 times earnings.
Growth slowdown talk notwithstanding, sell-side analysts still expect mid-to-high single-digit earnings growth in the coming years.
Over time, shares will rise in tandem with this earnings growth, and the stock’s dividend (2.61% forward yield) will likely keep increasing as well, as it has for the past 66 years.
Still a top choice for stability and yield, feel free to buy PG stock.
PG stock earns a B rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place