Procter & Gamble (NYSE: PG) has established a reputation for delivering steady results and dividend growth, regardless of the economic cycle. In fact, P&G is so consistent that it has raised its dividend for 69 consecutive years, an extensive streak that puts it at the top of an elite list of companies known as Dividend Kings.
But the maker of laundry detergents, dish soap, paper towels, razors, and more slipped 3.7% on April 24 in response to its third-quarter fiscal 2025 earnings report. Let's dive into key takeaways from the report to see if the sell-off in P&G is justified, or if it's an excellent buy now.
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When P&G reported second-quarter fiscal 2025 results in January, it was guiding for full-year sales growth of 2% to 4%, diluted net earnings per share (EPS) growth of 10% to 12%, core EPS growth of 5% to 7%, $10 billion in fiscal year dividend payments, and $6 billion to $7 billion in stock buybacks.
But P&G's latest quarterly results were weak, with a 1% decline in volumes, just a 1% increase in price, and a 2% overall decline in net sales.
P&G is maintaining its full-year sales growth and capital return targets, but has revised its EPS guidance downward. It now expects diluted EPS growth of 6% to 8% and core EPS growth of 2% to 4%.
With just one quarter left to go in P&G's fiscal year, a cut to full-year guidance essentially means the weak results won't be made up for in the coming quarter.
P&G has an impeccable track record of passing higher input costs on to customers through price increases. This strategy allowed P&G to steadily grow earnings despite inflation and supply chain disruptions in recent years. P&G is still delivering decent results, but it is clearly hitting a bit of a roadblock.
On the earnings call, management didn't shy away from detailing pressures on consumers. P&G CFO Andre Schulten said the following in response to an analyst question:
The consumer has been hit with a lot of volatility, market volatility, that impacts their portfolios, their 401(k)s, volatility in the economic outlook, uncertainty on the job market, volatility in terms of mortgage rates expectations, all the divisiveness and nationalistic rhetoric that we saw around the world, uncertainty on tariffs and the impact on prices and availability of goods. So, I mean, the consumer has been hit with a lot, and that's a lot to process. So what we're seeing, I think, is a logical response from the consumer to pause. And that pause is reflected in retail traffic being down.
Management noted that value consumption is down in both the U.S. and Europe. Later in the call, P&G stated that tariffs would affect the business by $1 billion to $1.5 billion annually, before tax, which is approximately 3% of the cost of goods sold. P&G described the effect as "not immaterial" and said it would have to offset that effect through productivity improvements.
Tariffs and consumer weakness are affecting near-term results and are cause for lowering guidance, but they aren't so bad that they'll derail P&G's mid-term outlook.
Compared to its competitors, P&G is better positioned to handle tariff pressures. The company has far better operating margins compared to its peers, giving it wiggle room to absorb higher tariff-related costs. It also has several brands across major categories, which allows it to retain customers even if they pull back on spending.
A good example is detergent. P&G owns Ariel, Downy, Gain, Tide, Era, and other laundry brands. Each brand has different strengths depending on price and geography. By owning multiple brands and continuing to innovate with new products, P&G can retain customers even if they pull back on spending. On the earnings call, P&G discussed how it is launching OxyBoost Power Pods this quarter to provide a more powerful clean and Gain Odor Defense for 40% more freshness.
P&G is delivering new products at the top end of the product line with Tide and the mid-tier with Gain. If a customer switches between those brands, P&G doesn't completely lose the sale, which would happen with companies with fewer brands. P&G has a similar advantage with other product categories, like Dawn and Cascade for dish soap.
P&G's results and management commentary on the earnings call show that even top "recession-proof" companies aren't immune to tariffs. But the sell-off in P&G could be a buying opportunity for long-term investors.
All things considered, the guidance cut isn't too bad, and P&G made no changes to its capital return program. P&G has a dividend yield of 2.6% and still plans to return $6 billion to $7 billion to shareholders in fiscal 2025. This goes to show just how massive P&G's capital return program is, which it can support given its extremely efficient and diversified business model.
P&G stock is now sitting just 3.3% above its 52-week low, pushing down its price-to-earnings (P/E) ratio to just 25.6, and nearly identical to its 10-year median P/E of 25.7. So investors are now getting the chance to scoop up shares of P&G for a better value.
P&G is a solid buy for risk-averse investors looking for a reliable source of passive income amid tariff turmoil. A small, temporary dip in earnings and margins is possible, but this shouldn't jeopardize the company's commitment to returning capital. And if the situation worsens, P&G can always reduce its stock repurchases without affecting its dividend. P&G has pulled this lever in past downturns and recessions, which is why buybacks have fluctuated over the years, but dividends have increased steadily regardless of economic conditions.
P&G's stock price could remain under pressure in the near term due to tariff uncertainty. But nothing about the long-term investment thesis has changed. That makes the stock worth a closer look, especially now that its valuation is more reasonable.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.