P&G Investors Optimistic Ahead Of Q4 Results As Turnaround Picks Up Steam

• Reports Q4 2019 results on Tuesday, July 30, before the open

• Revenue expectation: $16.86 billion

• EPS expectation: $1.05

Judging by the trajectory of Procter & Gamble's (NYSE:PG) share price, investors are expecting an extraordinary performance from the world’s largest maker of household products when its reports Q4 earnings tomorrow.

The stock has gained more than 40% during the past 12 months, outperforming its peers and the benchmark S&P 500 Index. Closing on Friday at $114.73, the shares are trading ahead of the analysts’ 12-month consensus price target of $110, with its trailing price-to-earnings multiple of 27.54 close to the highest in five years.

P&G price chart

What’s fueling these expectations is the company’s strong growth in sales and the success of its turnaround strategy. In April, the maker of Tide detergent and Gillette razors reported its strongest quarterly sales growth in eight years, helped by higher prices and growth in developing markets.

Building Momentum

Under Chief Executive Officer David Taylor, Cincinnati-based P&G has cut its roster of brands from 175 to 65, focusing on the 10 product categories where the margin is highest. During the course of that process the company has also eliminated 34,000 jobs through a combination of brand sales and buyouts, as well as plant closures—slashing more than $10 billion in costs.

The results of these efforts have been encouraging for investors: In 3Q, organic sales—a closely watched metric that strips out currency moves, acquisitions and divestitures—rose 5%. It was the third consecutive quarter of solid sales gains for P&G. The company attributed 2 percentage points of the overall gain to price increases and another 2 percentage points to higher shipment volumes compared with a year ago.

Will P&G be able to sustain this momentum going forward? We believe that’s very much a possibility, given the company’s successful response to dwindling consumer brand loyalty. For example, P&G’s beauty division is performing strongly, getting a big boost from its SK-II skin-care line. Organic sales of beauty products climbed 9% in Q3, in addition to gains in the health-care, fabric and home-care units.

The other reason to be optimistic about P&G’s next fiscal year outlook is that consumers are willing to pay more for the company’s products. P&G started implementing phased price increases last summer after failing to revive growth by doing the opposite. The shift in pricing strategy will be completed by February, which could boost prices between 4%-10% on products including its Pampers, Bounty, Charmin and Puffs brands.

Bottom Line

P&G stock remains our favorite pick for income-seeking investors. It's one of the largest dividend payers in the U.S. with a track-record that's hard to match. The maker of Pampers diapers and Dawn dish soap has hiked its payout for 62 consecutive years. Now that growth is back on track, investors should expect more hefty dividend hikes and we see little reason to abandon this consumer powerhouse