Is it Time to Buy Procter & Gamble Co. Stock?

By Demitrios Kalogeropoulos Markets Fool.com

Image source: Getty Images.

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Halfway through its 2017 fiscal year, Procter & Gamble (NYSE: PG) looks like a business on the mend. Sales growth is running ahead of management's forecast, in contrast to rivals Kimberly-Clark (NYSE: KMB) and Unilever (NYSE: UL).

Sure, none of these consumer-goods stocks will post big gains if their global industry continues to bounce along at near zero growth. But there are some good reasons for investors to prefer P&G over its peers right now.

Growth momentum

The stock has underperformed the market over the last one-year and three-year time periods as revenue growth slowed to a crawl. Organic sales ticked up by just 1% in fiscal 2016, a time that coincided with roughly 4% gains for both Unilever and Kimberly-Clark.

P&G still produced plenty of cash last year and managed a spike in profits, thanks to aggressive cost cuts. And those wins translated into significant improvements in direct returns to shareholders through dividends and stock buybacks. However, as the company explains in its 10-K report, its ability to generate solid long-term returns starts with organic sales growth that's higher than the categories and geographies in which it competes.

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Image source: P&G investor presentation.

P&G isn't there yet -- but it's getting closer. Last quarter, organic sales growth was driven by strong volume gains. Better still, its sales pace has now accelerated for three straight quarters in both the U.S. and China, its two largest markets.

As a result, executives raised their full-year outlook to 2.5%, or more than double last year's result. Kimberly-Clark, meanwhile, is projecting just 2% growth in 2017, down from the 4% it originally hoped to achieve in 2016.

Profits and cash

Whether sales growth comes in just above or below that target, it's clear that P&G's profits are headed higher. This metric hasn't been useful for investors to follow lately thanks to the combination of massive foreign currency swings and a brand divestment initiative that's alternatively pinched, and supercharged short-term results. Reported net earnings dove by 40% in 2015 before soaring by 49% last year.

PG Net Income (Annual) data by YCharts.

That's why shareholders should focus on core earnings, which strip out those one-time effects. P&G aims to improve that figure by around 5% annually, yet has endured a 2% decline in each of the last two fiscal years.

Things will be different in 2017. Core earnings rose 5% in its fiscal first quarter and by 4% in the second quarter, which puts it on track to meet, or even slightly exceed, its long-term goal. These gains smooth the way for unusually large cash returns to shareholders over the next few years.

P&G plans to deliver a record $22 billion to its investors in 2017. Most of that will come in the form of stock repurchases. But its dividend payout ratio is also improving to the point where income investors should see a stronger raise this year than the 1% uptick they received in 2016.

Valuation and outlook

The rising fortunes help explain why P&G's stock outperformed both Unilever and Kimberly-Clark over the last year even though all three companies trailed the Dow by a wide margin. Much of that optimism is already factored into the share price, though. P&G is valued at 23 times expected earnings, compared to about 20 times for its peers.

The company will earn that premium if it achieves market-beating organic growth at a higher profitability level, as management has promised would result from its shift to a more focused product portfolio. Sluggish market conditions could always push the timing of that rebound out, but for now, it looks like P&G is at least on track to meet its operating and financial goals for the first time in three years.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Unilever. The Motley Fool has a disclosure policy.