Procter & Gamble Cleans House
Procter & Gamble CEO A.G. Lafley has outlined a plan to focus on 70 to 80 “leadership brands” that currently generate 90% to 95% of profit. PHOTO: REUTERS
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Leave it to Procter & Gamble Co. to tell us that good things also come in small packages.
The consumer-products behemoth is in the early stages of an ambitious program to shape up by shedding products and divisions. Chief Executive Officer A.G. Lafley, who returned to the plodding company for a second stint at the helm in May 2013, has outlined a plan to focus on 70 to 80 “leadership brands” that currently generate 90% to 95% of profit.
Tuesday’s fiscal second-quarter results will give management an opportunity to update investors on progress. It should make for a more pleasant topic than the numbers themselves.
Analysts polled by FactSet see the company reporting an adjusted $1.13 a share, down from $1.21 a year earlier. Forecasts are 15 cents lower than they were in July. The chief culprit is likely the strong dollar, as P&G derives roughly two-thirds of revenue outside the U.S.
Still, investors mostly gave positive reviews to recent actions such as the sale of Duracell to Berkshire Hathaway Inc. in exchange for P&G stock. But questions remain about the effectiveness of divestitures as part of Mr. Lafley’s strategy.
Since the day after his return was announced, the shares have trailed the S&P 500 by about 12 percentage points in terms of total return. Going back even farther to Mr. Lafley’s transformational deal to buy Gillette (including Duracell) in 2005, the stock has barely kept pace with the market. At that time, P&G touted the benefits of size that would give it more sway with purchasers and unlock synergies.
Maybe there is no new-and-improved magic formula for reinvigorating P&G. The most meaningful improvement recently has been ruthless cost-cutting initiated under the man who succeeded and then was succeeded by Mr. Lafley: Bob McDonald.
So while sales growth has been anemic, margins have been resilient lately. Even without Berkshire’s stock redemption, P&G should be able to return an impressive $12 billion to $14 billion to shareholders via dividends and buybacks in fiscal 2015. That is equivalent to about 5.4% of its market value.
It is too early to say whether P&G will clean up as it slims down, but the past few years of good housekeeping are paying off.
