A Good Gamble

Dear Mr. Berko: Thanks to you, we sold 800 shares of Yahoo at $46 last year. Now our stockbroker recommends 200 shares of Procter & Gamble. Why have Tide revenues increased so much? What do you think of this stock? — TS, Waterloo, Iowa
TS: I’ve liked Procter & Gamble (PG-$82.22) since October 1988, when I did something I seldom do because I was too smart by half. PG was trading at $81.25, and I placed a limit order to buy 100 shares at $81. My order didn’t execute. The next day, it traded at $82, and my ego got in the way. Since 1988, PG has split 2-for-1 three times, so the 100 shares I didn’t buy for $8,125 are now 800 shares worth $65,776. PG’s dividend has increased every year since 1957, and in the past decade, that dividend has tripled, from 93 cents to perhaps $2.75 this year. The lesson is simple: Long-term investors should never place limit orders. Because I’m a long-term investor, it wouldn’t have made a bit of difference if I’d paid $82 or even $83 a share. My misguided attempt to be frugal backfired on me.
PG is headquartered in Cincinnati, where Skyline Chili and Graeter’s ice cream, especially the black raspberry chocolate chip, rule the roost. In 1837, Bill Procter and Jim Gamble put this company on the map by selling soaps and candles from their Cincinnati storefront. Dubbed “Porkopolis” because of its numerous meatpacking plants, Cincinnati had plenty of fat and oil for soap- and candle-making. Bill and Jim easily shipped their product by boat along the Ohio River to clamoring consumers in such cities as Louisville, New Orleans, Pittsburgh and Memphis. And by 1859, Procter & Gamble had 82 employees and annual revenues of $1.1 million. The candle business peaked after the Civil War, and the company introduced Ivory soap (99.44 percent pure), which became PG’s first branded product, followed by VapoRub, Crisco, Gillette and Max Factor. “Now you know the rest of the story.”
Today PG is the largest consumer products company on the planet, with a market cap of $217 billion, $65 billion in revenues (after over 100 product spinoffs), net profits of $10.75 billion plus an expialidocious 15.9 percent net profit margin.
During the past two years, PG, with over 170 products, began reducing its product line and become a more nimble, flexible company. PG’s brands include Tide, Bounty, Crest, Pampers, Braun, Charmin, Oral-B, Prilosec OTC, Tampax, Bold and 55 other brands — 21 of which generate over $1 billion in annual revenues. During this process, management has trimmed its workforce, localized sourcing of raw materials and product development, and reduced its manufacturing platforms by 37 percent. This will translate to significant cost savings that should quickly become evident. PG’s smaller size will enable management to increase productivity through numerous supply chain improvements. This also will increase manufacturing efficiencies and lower operating costs, which, combined with improved distribution channels, should nicely widen operating margins from last year’s 15.9 percent to 18.2 percent by 2020.
In the coming three years, PG expects $21 billion in new revenues, growing to a record $86 billion in sales by 2020. Management also expects earnings to grow from last year’s $2.76 a share to $5.90 in 2020 and believes that its dividend could improve from $2.75 a share to $3.45. And if management meets those goals by 2020, PG, with an average long-term price-earnings ratio of 19.5-to-1, could trade between $115 and $125 a share and split again.
Trading in the low $80s, PG isn’t a bargain; rather, it’s fairly priced. So just buy 100 shares at the current trading price. And because I think the Dow Jones industrial average will continue to have volatile trading days, with 200- to 300-point sell-offs, I’d place a good-till-canceled order for the second 100 shares at $65, which was its trading low in 2015.
PG, which has increased its dividend annually for 58 consecutive years, should be a core holding for every long-term growth and income account. Meanwhile, Tide’s revenues jumped because some drug dealers began accepting 150-ounce bottles of Tide in lieu of cash.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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