5 Things Procter & Gamble Company Does Right

By Markets Fool.com

Procter & Gamble (NYSE: PG) stock recently touched $90 per share -- just a few percentage points below an all-time high. The consumer goods titan is up 20% in the last 12 months, making it one of the best-performing members of the Dow.

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That share-price gain seems to clash with P&G's sinking business trends. Organic growth slowed to just 1% in 2016 from 2% the prior year and 3% in fiscal 2014. However, the company is managing important financial and operating wins that help explain why investors are so optimistic about its stock right now.

1. Cost cuts

Every blue chip business is looking for ways to cut costs, but few have had as much success as P&G. It has sliced down its expenses on cost of goods sold to the point where it is saving nearly $1.5 billion per year -- beating the $1.2 billion goal management set in 2012.

PG Cost of Goods Sold (TTM) data by YCharts.

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Since 2012, costs in just that category have dropped by $7 billion. P&G plans to achieve even better results ahead, targeting $10 billion of cumulative productivity savings through fiscal 2021. These improvements promise to send profitability higher.

2. Cash flow

One of P&G's core long-term financial targets is to achieve cash flow productivity, or the ratio of free cash flow to adjusted earnings, of at least 90%. The company has trounced that target lately. In fact, P&G generated $12.1 billion of free cash in the past 12 months on earnings of $10.5 billion, yielding a ratio of 115% of earnings.

This increase has helped keep cash returns to shareholders rising even as earnings decline due to to a weak selling environment, brand divestments, and foreign-currency moves.

3. Marketing

P&G is a skilled marketer -- and that success goes far beyond simply putting out effective TV advertisements at global events like the Olympics. While any company with a large budget can make an international splash like that, P&G's marketing reaches an entirely different level.

Image source: P&G.

For example, its relationships with hospitals across the country helps it get trial samples of Pampers diapers to 70% of new moms. And when it launched a new Gillette razor recently, its marketing department succeeded in getting a trial product into the hands of 80% of young men.

4. Cutting its losses

The company has proven itself ruthless when it comes to walking away from market segments that don't offer the right mix of sales and profit growth. This month's $11 billion sale of its beauty business to Cotyis just the single biggest example, but there are over 100 more including P&G's exiting of the value-priced Mexican tissue paper niche.

Overall the company has whittled its portfolio down by 105 brands representing 15% of its 2013 sales but just 6% of earnings. Going forward, that shift should produce a leaner, faster-growing, and more profitable company.

5. Cash returns

P&G's cash returns have always played a key role in the total returns that shareholders can expect from this stock. In the five years ended in fiscal 2015, the company delivered $60 billion to investors at a pace of about $12 billion per year. Smaller rival Kimberly-Clark, in contrast, has returned about $2 billion per year to shareholders over the last decade.

FY = Fiscal year. BN = Billion. Image source: P&G investor presentation.

While Kimberly-Clark's return outlook is stable at just below $2 billion, P&G's is soaring. The company expects to deliver $22 billion to shareholders this year on its way to $70 billion in the three years ending in fiscal 2019.

These significant wins have helped power solid gains for P&G shareholders lately, but the successes won't mean much if the company can't begin clawing back lost market share. The projected uptick to 2% organic growth this year is encouraging, but it would represent only a small step toward that goal.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter and Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.