The single biggest holding among the 866 stocks in Ray Dalio (Trades, Portfolio)'s Bridgewater Associates' portfolio is Procter & Gamble Company (PG, Financial), according to the firm's latest 13F filing for the third quarter of 2022. Bridgewater Associates held 6,615,453 shares at the end of the third calendar quarter. Based on the Jan. 3, 2023 closing price of $152.33, that makes the holding worth $1,007,731,955.49.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Procter & Gamble represents 4.23% of Bridgewater’s 13F portfolio, a significant commitment. Let's take a closer look at this stock to see what Dalio's firm might like about it.
About Procter & Gamble
Founded in 1837 in Cincinnati, Ohio, where it is still headquartered, the consumer products company has a market cap of $359.17 billion and had trailing 12-month revenue of $80.461 billion.
The company noted in its 10-K for fiscal year 2022 (which ended on June 30) that it has a portfolio of leading brands, 20 of which generate more than $1 billion dollars a year in global sales, such as Tide, Charmin, Pantene and Pampers.
The company no longer has any food brands, with the last of them, Pringles, being sold to Kellogg (K, Financial) in 2012. International sales accounted for about 55% of consolidated sales in fiscal 2022.
Competition
Procter & Gamble describes its competition as follows: “The markets in which our products are sold are highly competitive. Our products compete against similar products of many large and small companies, including well-known global competitors.”
This five-year chart shows it has frequently outperformed the S&P 500, and significantly outperformed its peer index:
The company says it considers itself well-positioned to keep its market share and margins. Many products have the leading or major shares in the markets they serve. Backing up its well-known brand names are patents and trademarks, along with advertising, promotions and other marketing tools.
Financial strength
First, let’s acknowledge Procter & Gamble has a lot of debt, but on the positive side, it has been similarly indebted for more than a decade:
Thus, that doesn’t concern me much. Its interest coverage ratio is 39.14, which tells us the company generates $39.14 in operating income for every dollar of interest expense. It’s hard to imagine the firm getting into trouble because it could not pay the interest on its debt.
The Altman Z-Score of 5.44 means that in terms of bankruptcy risk, Procter & Gamble is well into the safe zone.
The company’s weighted average cost of capital (WACC) is 4.74% while its return on invested capital (ROIC) is 13.42%. That means it creates extra value for shareholders by working with borrowed funds.
As for the company’s philosophy on the use of debt, it wrote in the 10-K, “We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment and financing plans (including acquisitions and share repurchase activities) and the overall cost of capital.”
Profitability
Procter & Gamble has been profitable for all 10 years of the past decade. That reflects its industry-leading operating and net margins of 22.03% and 18.11% respectively. Indeed, all of its key profitability measures are industry-leading, based on the GuruFocus summary page.
Where the company has faced headwinds is in issues over which it has limited control. In its first-quarter fiscal 2023 report, it noted,
“P&G said its current fiscal 2023 outlook includes headwinds of approximately $1.3 billion after-tax due to unfavorable foreign exchange rates, $2.4 billion due to higher commodity and materials costs, and $200 million from higher freight costs. Combined, these items are a $3.9 billion after-tax headwind, or approximately $1.57 per share, to fiscal 2023 earnings versus fiscal 2022, or a headwind of approximately 27 points to EPS growth. The $3.9 billion headwind is an increase of $600 million after-tax versus guidance provided in July, primarily driven by foreign exchange.”
Its earnings per share without non-recurring items were $5.81 in fiscal 2022, so a loss of $1.57 per share is material. Analysts from Morningstar (MORN, Financial) expect $5.81 again for full fiscal 2023.
Growth
The GuruFocus system gives Procter & Gamble a better-than-average growth rank of 7 out of 10. That’s based on its three- and five-year revenue growth rates, the predictability of the five-year revenue growth rate and the five-year Ebitda growth rate:
This five-year chart shows that revenue has grown, and grown predictably over the past three and five years:
Except for the fourth quarter of fiscal 2019, Ebitda has been relatively stable:
Addressing earnings per share without non-recurring items will require two charts. The first shows EPS without NRI on a quarterly basis, up to the end of fiscal 2022:
That looks much like the chart for Ebitda and indicates that quarterly returns have been flat over the past five years. But, if we look at an annual chart, we might get the impression that profitability has grown over the past three years:
So, don’t be misled by the high earnings growth rates in the table above. There has been a rapid recovery, not a rapid gain, in Ebitda and EPS without NRI.
Why was the fourth quarter of fiscal 2019 so bad? It wasn’t, in a manner of speaking. As its earnings release for the period explained, it was due to a one-off charge: “Diluted net loss per share was $2.12, down $2.84 versus the prior year due primarily to one-time, non-cash accounting adjustments to the carrying values of the Gillette Shave Care business.”
Dividends and share repurchases
At 2.35%, the Procter & Gamble dividend yield is higher than the latest average for S&P 500 companies, though that's not saying much. But, the most important characteristic of its dividend situation is its status as a Dividend King. Having raised its dividend for 66 consecutive years, it is well above the Dividend King minimum of 50 years. Only 41 of the many thousands of publicly traded stocks have reached this elite level.
Over the past 10 years, it has consistently raised its dividend by an average of 4.45% per year. Until this year, that has beaten inflation by a significant margin, and likely will again when inflation gets back to around the 2% level.
It also has bought back its own shares quite consistently over the past decade, reducing the number of shares outstanding by an average of 1.66% per year. Combined with the dividend yield, that indicates a return to shareholders of roughly 4% per year - if the market were rational (which it often is not).
Valuation
The GF Value chart, which comprises historical multiples, a proprietary adjustment factor based on past returns and growth and estimates of future performance, finds the current valuation fair:
At the close on Jan. 4, 2023, the share price was $153.33, just above the GF Value price of $151.72.
The price-earnings ratio is 26.57, which is relatively poor compared to the rest of the consumer packaged goods industry median of 17.51.
Over the past five years, the Ebitda growth rate was 9.10% per year, and dividing the price-earnings ratio by the Ebitda growth rate provides a PEG ratio of 2.92. That’s above the PEG fair-value standard of 1.00.
Because of that dip in Ebitda and EPS without NRI in 2019, the company has a one-star business predictability rating.
Overall, the data indicates a fair to modestly-overvalued share price.
Gurus
Procter & Gamble is one of the most popular stocks among the investing legends, with 22 of them holding positions at the end of September.
Despite reducing his stake by 1.95% in the third calendar quarter, Ray Dalio (Trades, Portfolio)'s Bridgewater still had 6,615,453 shares.
Stephen Yacktman is also a major investor. His Yacktman Asset Management (Trades, Portfolio) held 2,953,251 shares after a 3.23% reduction in the quarter. The Yacktman Fund (Trades, Portfolio) owned the bulk of that with 1,450,000 shares.
Institutional ownership comes in at 59.74% and insiders have a 0.28% stake.
Conclusion
I believe that Procter & Gamble is a good company, despite its debt and current valuation. It owns leading brands and has delivered solid returns to shareholders for years. The dividend is among the most reliable available. It buys back its own shares when prices are appropriate and because of its popularity among investors, its share price keeps rising.
