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Inflation is one product P&G isn’t pushing

Bounty paper towels made by Procter and Gamble are shown for sale in Encinitas, California, April 19, 2021. REUTERS/Mike Blake

NEW YORK, Oct 19 (Reuters Breakingviews) – Procter & Gamble (PG.N) may be tough on grime, but surprisingly gentle on households’ finances. The $346 billion consumer goods giant reported a 5% increase in quarterly sales on Tuesday. While the cost of making its products increased 13% in the quarter, it passed on just a 1% price increase to retailers. When the operating environment is tough, it pays to be big.

Supply-chain blockages and higher input costs hit P&G as they have many large companies. So while sales were better than a year ago in its healthcare division, and even its historically weak razor business, earnings fell by 4% in the three months to Sept. 30. Chief Executive David Taylor says the problems will continue. Freight and commodity expenses combined are likely to rise $2.3 billion, after tax, in the company’s fiscal year, which ends in June.

That’s not ideal for shareholders, but P&G has remained undented in some important places. Gross profit margins – an indirect sign of the premium P&G products command – are still nearly 50%. Cash flow from operations fell only slightly. With cash on the balance sheet, Taylor has been able to increase the dividend. His planned $17 billion in dividends and buybacks for the year exceeds P&G’s estimated earnings of $15 billion, according to Refinitiv.

P&G now has two things going for it. First, consumers aren’t changing their buying habits because of higher prices. Second, the company is big enough to sidestep some supply-chain problems in a way smaller firms can’t. P&G can pivot more easily to other regions if goods or freight carriers are unavailable. Vice Chairman and incoming Chief Executive Jon Moeller noted that P&G has become a “very attractive customer for our suppliers,” partly because of its size.

If inflation is coming to the supermarket shelf, P&G can therefore afford not to be the main perpetrator. By sponging up input cost hikes, it could use the next several quarters to keep prices in check and gain market share from smaller firms who have been chipping away at P&G’s position. The company’s price-to-earnings ratio, at 26 times, is higher than peers like Kimberly-Clark (KMB.N), and at the top end of where it has been historically. Investors have high expectations, but P&G should live up to them.

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CONTEXT NEWS

– Procter & Gamble on Oct. 19 reported $20.3 billion of revenue for the three months ending Sept. 30, 5% higher than the same quarter last year. Sales in the healthcare division, which includes respiratory products, increased 8%.

– Analysts were expecting the company to post sales of $19.9 billion, according to Refinitiv. P&G reports “net sales” after deducting marketing costs shared with retailers.

– Earnings dropped 4% year-on-year to $4.1 billion as the cost to the company of products sold increased 13%.

– The company run by David Taylor said that it expects after-tax commodity costs to rise $2.1 billion and after-tax freight costs to be $200 million higher in its fiscal 2022 year, which ends on June 30.

Editing by John Foley and Amanda Gomez

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

Michael Maren
Former marine biologist who likes to spend as much time in the tropics as possible, due to a horrible time I once had in Alaska. Brrrr.

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