Procter & Gamble (PG) is one of the world’s leading manufacturers of consumer products, from toilet paper to laundry detergent. Procter & Gamble is not the only company in this field, but it differs significantly from its competitors in its scale.
First, the company’s market capitalization exceeds $390 billion. Second, it offers a huge list of products from every area needed for the home. Third, the company has strong relationships with its customers. Fourth, the issuer has an extensive distribution network and marketing that is honed to perfection.
Procter & Gamble not only sells but also improves existing products and develops new products, periodically launching new product lines. Another distinguishing feature of the issuer is regular dividend payments. The company has been paying dividends for more than 130 years, and the payout has increased 65 times during that time. The quarterly payout increased 10% in 2021 to $0.87 per share.
PG’s business has thrived over the past decades, but the issuer made record gains during the pandemic when demand for personal care products increased. The company is constantly in the process of self-improvement, and Procter & Gamble management is doing everything it can to improve profitability.
Now the company is focusing on those products with performance that drives demand. In recent years, Procter & Gamble has made changes in marketing, packaging, and selling prices. As a result of all these actions, the operating margin has increased from 18% to almost 23% over the last 7 years.
The company’s fiscal year 2021 ended on June 30. The issuer finished it with a 7% increase in revenue compared to 2020. Revenue reached the level of $76.1 billion. Diluted earnings per share also rose. That figure rose 11% to $5.66.
The consumer goods maker also started the new year with positive numbers. The company reported net sales of $20.34 billion in Q1 of the new fiscal year, an increase of 5.3% over the same period in 2021. After that, analysts revised their forecasts for the better. It now stands at $19.87 billion for Q2. PG showed organic net revenue growth throughout the quarter of 4%, driven by a 2% increase in sales volumes, a 1% increase in prices.
The company dominates the market and can raise prices to compensate for rising costs and inflation. Despite rising prices, the company remains profitable. Diluted Q1 2022 non-GAAP earnings per share fell just 1.2% year-over-year to $1.61 for the quarter. That was just above the $1.59 forecast. The company started well and now expects a 3% sales growth by the end of 2022.
P&G is a dividend aristocrat
The company’s dividend payments have been rising steadily. But is the dividend payout ratio low enough to withstand a temporary decline in the company’s profitability? Assuming quarterly payouts increase by 7% in 2022, which is $0.93 per share, the company would pay $3.54 per share. When compared to the non-GAAP diluted earnings per share of $5.92 that the company is expected to earn in 2022, that would correspond to a payout ratio of 59.8%. This ratio level provides a balance between payouts to shareholders and investments to ensure future earnings growth.
No one will argue that this paper is fundamentally strong. Nevertheless, it begs the question, does its price match its value? The company’s forward P/E ratio is 25.7, which is slightly lower than the industry average of 32. It shows that the paper is attractively priced relative to its competitors.
Nevertheless, it is also important to look at the issuer’s growth prospects compared to its competitors to see if it is undervalued. For example, the issuer’s annual profit growth of 7% is in line with the industry average. Over the past five years, the paper has doubled in value. Now it is traded at a price that is 27 times the forward earnings estimates. At the same time, the above-average dividend yield of 2.1% looks more than attractive. The company pays only 55% of its free cash flow to shareholders, which gives it ample opportunity to continue increasing dividend payments even if the business experiences stagnation.
The company’s growth has been steady in 2021, and we expect the positive trend to continue in 2022. The annual increase in dividend payments makes this paper an attractive investment for people looking for stable profits and a company with solid fundamentals. However, now the market is going down, and it’s too early to talk about buying. But it’s an excellent opportunity to buy the shares soon at a perfect price. Let’s wait for the return above $160, then buy the asset in the direction of $185.
Netflix (NFLX) shares have gained about 6% over the past 12 months, while the S&P 500 has gained 26% over the same time. The paper’s sluggish performance made the streaming video giant the second weakest member of the FAANG group, only slightly ahead of Amazon (AMZN). Is there a chance that Netflix will continue its growth and show more meaningful results in 2022? Yes, there is. The fact is that against the backdrop of an impending increase in rates, investors began to abandon fast-growing, loss-making, and speculative shares of technology companies. Let’s take another look at the Netflix business and see what could be in store for the company in 2022.
Increase in subscribers
One measure of the company’s health is the number of new subscribers. In Q2 FY2021, 1.5 million people joined the company; in Q3, that number rose to 4.4 million, the largest increase in subscribers since Q4 2020.
After phenomenal growth in 2020, weak performance in early 2021 disappointed investors, and many felt that Netflix’s growth had stopped and it would gradually become a second-rate company. Therefore, the encouraging figures of the third quarter have returned hope that the streaming service has a future after all.
Netflix management expects the number of subscribers in Q4 to reach 8.5 million, which would match the 8.5 million the company attracted during the same period two years ago. If the growth rate continues, Netflix plans to gain 8 to 9 million new viewers each quarter.
It’s time to look at the advantages that competitors don’t have. Let’s start with profitability, where the operating margin should exceed 2% of sales in 2022. Let’s say right away that this is double the current level of Roku and Roblox.
Netflix stock is traded at 47 forward earnings, making it the second most expensive company among FAANGs. Only Amazon has a higher multiple of 54 times forward earnings.
Another factor is cash flow, which is likely to push the paper to new highs. Netflix expects to generate positive cash flow in 2022 for the first time since the company started streaming video.
The company’s CFO, Spencer Neumann, estimates that over time, the cash flow could easily reach 15% of sales. This 15% is even more than other companies, such as Disney, can count on. The money is planned to finance share repurchases in 2022 and possibly dividend increases in the future.
Is Netflix’s growth gaining momentum?
The company had 214 million paid subscribers in Q3, which ended September 30, while the issuer ended Q3 2020 with 195 million. Management expects that amount to exceed 220 million by the end of Q4.
Netflix is a pioneering video streaming service of sorts. The company’s content became popular immediately, and the number of subscribers began to grow rapidly. The coronavirus pandemic accelerated this process. Millions of people who were forced to stay home stuck to their TV screens to find entertainment during lockdowns. For a mere $20 a month, people got access to interesting movies and shows. Not surprisingly, the number of subscribers to the service exploded several times during that period.
Therein lies the secret to Netflix’s growth: a value proposition for customers that is second to none. Depending on the country, the price of a Netflix subscription may decrease. The company offers a variety of content for every taste, which the system selects individually for each viewer, based on his or her tastes. And it’s not just films from world studios; the company itself makes movies and TV series that are popular all over the world.
On September 19, 2021, Netflix received 44 Emmy Awards from the Television Academy – more than any other company.
The issuer also won the most awards of any studio at the 93rd Academy Awards in April 2021.
You can watch movies anywhere you have an Internet connection. And the picture quality is always at a high level. These advantages are unlikely to change over time and will help the company attract more and more customers.
The streaming service now has an annual revenue goal of $30 billion. In the first nine months of 2021, the company spent $12 billion on content. By comparison, about $8.5 billion was spent on content in the same period in 2020.
The money invested has made it possible to create several blockbusters, such as the series Squid Game, seen by 142 million families. Characteristically, the company doesn’t need to spend separately on advertising. Social media word of mouth draws crowds of people to the company’s services. It took years for the company to make a name for itself, and now it is reaping the rewards it deserves.
Interesting fact. The company’s business is growing, but its shares are relatively inexpensive. Judging by its price-to-earnings ratio of 55, it is sold at its lowest price since 2012.
The company has reached such a size that it is difficult and expensive for others to compete with it. In addition, it offers superior service compared to alternatives at a better price. And the stock price makes them attractive to buyers.
Admittedly, despite the attractive price, we won’t buy it now. The sellers are still strong, and we do not see signs of a reversal yet. So, we recommend refraining from buying this asset now.