Why Procter & Gamble is the Perfect Buy & Hold Stock

Household and personal products maker Procter & Gamble (NYSE: PG) is often abbreviated P&G, but it may as well be called "B&H" for Buy and Hold. Fresh off one of its best annual performances, the stock continues to deliver outstanding shareholder value. And there's plenty more where that came from.

P&G has been in business since 1837 and its resilient nature makes it the ideal buy and hold investment. Today the company has a well-rooted global presence in over 180 countries and is generating nearly $68 billion in annual sales.

Its iconic brand portfolio spans 10 product categories that together represent a highly diversified consumer products growth engine. Nine of these segments and all six geographic regions produced organic sales growth in fiscal 2020. The broad-based organic growth of 6% was the best result since fiscal 2006 when revenue grew 7%. Core EPS growth was 13%, a remarkable result more commonly associated with a less tenured, higher growth phase company.

Of course, much of the recent growth stems from the pandemic-related spike in consumer spending on cleaning supplies and other essentials. But P&G's core business looks as strong as ever and will probably remain the foundation for stable growth for decades to come. The development of new products and emerging market expansion will provide the incremental growth opportunities needed to keep this stock charging higher.

How are Changing Consumer Habits Benefitting P&G?

P&G has risen to the occasion during the COVID-19 crisis. It made maximizing product availability a top priority and its supply chain has delivered. While some initial product shortages occurred, it filled supermarket shelves and made sure business effectively flowed through online channels amid unprecedented demand.

Although the double-digit profit growth of fiscal 2020 may be an anomaly, there are signs the pandemic is altering consumer shopping habits for good. 

Since economies have reopened, a rise in COVID-19 cases in many parts of the world, is keeping spending patterns elevated. A second wave of stockpiling is plausible going into the fall and winter flu seasons as people bunker down for colder weather and the possibility of a resurgent spread of the virus.

Beyond the current crisis, consumer attention towards sanitation and personal care will likely persist. P&G has noted sustained demand for personal care products even as lockdown restrictions have eased.  

Instead of just grabbing a bottle of multi-purpose cleaner, people are buying more types of cleaning products that serve specialized purposes for countertops, floors, and bathrooms. Higher volume purchases of personal hygiene products are following a similar pattern.

People want to maintain clean homes and workplace environments like never before. This is great news for P&G. Even once the pandemic subsides, this behavior is unlikely to go away.

Online shopping is another trend that has accelerated during the pandemic and appears will have a high degree of permanence in the post-pandemic world. P&G said e-commerce business grew 50% in the second half of fiscal 2020 accelerating from 30% in the first half. In recognition of where consumer spending is headed, the company is aiming for e-commerce sales to exceed offline sales and for the profitability of both channels to be on par.

What Else can Drive Growth at Procter & Gamble?

In addition to evolving consumer attitudes towards cleanliness and online shopping, P&G has other catalysts that will allow it to build on its dominant market share.

Its brand lineup, which includes trusted names like Pampers, Tide, Head & Shoulders, Oral-B, Vicks, and, Old Spice, is only getting stronger. This is because the company never rests on its laurels.

We often hear about disruption in the technology world, but P&G has adopted its own "constructive disruption" approach to product innovation. It continually adapts to changing consumer needs and preferences by developing new products.

The Oral-B GENIUS X electric toothbrush is one example of how the company is changing with the times. The product uses artificial intelligence (AI) to give teeth brushers data-driven feedback through the Oral-B app about areas that need more attention while brushing.

The P&G Ventures studio collaborates with inventors, entrepreneurs, and start-up companies to create new brands and even new product categories.

Continued growth will also come from international markets. As its second-largest market, China is expected to be a major growth driver for P&G for many years to come. Since the country has reopened its economy, sales have been strong.

India will also be relied on for the next wave of growth. The country has favorable demographic trends including an emerging middle-class consumer with increased purchasing power that have made it a primary focus for the company.

Does Procter & Gamble Pay a Dividend?

P&G's financial statements are as pristine as its Swiffer cleaning products. The balance sheet has a strengthened liquidity position with $16.2 billion in cash compared to $4.2 billion a year ago. It has a manageable long-term debt balance of $23.5 billion that represents 44% of capital. The healthy balance sheet is supportive of organic growth pursuits and sustained dividend payments.

P&G is one of the most shareholder-friendly companies on the planet. Over the last 10 years it has returned more than $135 billion (almost half its current market cap) to shareholders through dividends and share buybacks. Roughly 62% of earnings are being paid out as dividends and it has increased its annual dividend for 63 consecutive years.

P&G is also one of the least volatile stocks in the S&P 500. So, when you combine its long-term track record of delivering reliable shareholder value with its limited risk profile, it starts to look like the perfect 'buy and hold' stock.

Simply put, P&G is one of the best dividend growth stocks money can buy for a long-term portfolio. It is also a great defensive position to own especially in this highly uncertain economic environment.

Propelled forward by pandemic demand, P&G has a bright future. Evolving consumer habits around personal care expenditures along with a propensity to make purchases online bodes well. Opportunities in faster-growing geographies also suggest the stock's ascent will be as smooth as a Gillette shave.