This study is to see the insights about the financial performance of Procter and Gamble and to analyse the company's overall profitability and suitability for the investors. We have done a detailed analysis of the company's past and present financial reports (FY 2009, FY 2010, FY 2011 & FY 2012) to assess the current financial situation of the company and to envisage the company's future risk potentials. Further, we have also compared the P&G's financial reports with one of its competitor i.e., Reckitt Benckiser, which has shown a definite growth in FMCG market in the recent past. So, overall our analysis is based on the information provided in the P&G's financial reports and also from other reliable sources. Information drawn from the analysis part has been interpreted and the results are analysed rationally.
Company's Background: - Procter & Gamble
Procter and Gamble is a globally recognised company and the market leader in fast moving consumer goods industry. The company was founded in the year 1837, since then it has grown vertically with series of mergers and acquisitions. It sells its products in 160 countries,
2. Financial performance analysis of P&G and Reckitt Benckiser
In this section we will be analysing the various financial strengths of P&G and comparing with Reckitt Benckiser. P&G has June-June financial year where as Reckitt Benckiser's financial year is December-December. Hence the comparison is done for P&G's 2012 to Reckitt Benckiser's 2011.
There are four major factors influencing the financial performance of the company, those are
Profitability - determines how much profit the company has earned in the last financial year
Solvency - ability to clear the company's short-term debts
Efficiency - determines the efficiency of balancing between current assets and current liabilities of the company
Investor Suitability - It in an investment area for investors and stakeholders based on the shares
2.1. Profitability Analysis
Table 1: Profitability analysis of P&G and Reckitt Benckiser
P&G
Reckitt Benckiser
Year
2009
2010
2011
2012
2010
2011
ROCE
19.25%
19.35%
17.57%
15.62%
27.70%
41.08%
NPM
22.10%
21.33%
18.40%
17.17%
25.27%
25.05%
GPM
50.78%
51.96%
50.62%
49.34%
60.58%
59.70%
2.1.1. ROCE: Return on Capital Employed
ROCE = Net profit before tax and interest *100
All shareholders funds plus loan
ROCE calculation for P&G
Year
Net Profit before Tax
Shareholder's fund plus loan
ROCE
2012
13292
85115
15.62%
2011
15818
90034
17.57%
2010
16021
82799
19.35%
2009
16123
83751
19.25%
ROCE comparision between P&G and Reckitt Benckiser
Company
Net Profit before Tax
Shareholder's fund plus loan
ROCE
P&G 2012
13292
85115
15.62%
Reckitt Benckiser 2011
2736
5784
41.08%
ROCE is one of the most important aspects of "profitability ratio". The usage of company resources to the fullest are determined by the ROCE percentage. If there is a constant increase in the ROCE year after year, this implies that the company's resources are used efficiently.
While analyzing the P&G report during the years 2009 to 2012 (refer table 1), ROCE has decreased drastically over the past two years after a slight increase from the year 2009 to 2010. This is mainly because of the decrease in the "operating income" and "shareholders equity" in the last two years. The operating income was $16,021 million in the year 2010 and has decreased a little to $15,818 million in 2011, then went down quite drastically to $13,292 million. Likewise shareholders equity also followed the same pattern as operating income, increasing from $61,439 million to $68,001 million from 2010 to 2011 and decreased to $64,035 million in 2012.
In comparison to Reckitt Benckiser (refer table 1), P&G has a very low ROCE ratio for the last two years. ROCE ratio saw a decrease from 17.79% to 15.92% for P&G, whereas there was an enormous increase in ROCE for Reckitt Benckiser from 27.7% to 41.08%. Overall the return for the investors in Reckitt Benckiser is close to thrice the amount the investors would get in P&G in their last financial year. Therefore ROCE for Reckitt Benckiser is very much encouraging and also clearly indicates the effective usage of resources than that of P&G.
2.1.2. Net Profit Margin (NPM) & Gross Profit Margin (GPM)
Net Profit Margin = Net profit before tax * 100
Turnover
NPM calculation for P&G
Year
Net Profit before Tax
Turnover
NPM
2012
14372
83680
17.17%
2011
15189
82559
18.40%
2010
16837
78939
21.33%
2009
17468
79029
22.10%
NPM comparison between P&G and Reckitt Benckiser
Company
Net Profit before Tax
Turnover
NPM
P&G 2012
14372
83680
17.17%
Reckitt Benckiser 2011
2736
9487
25.05%
Gross Profit Margin = Net profit before tax * 100
Turnover
GPM calculation for P&G
Year
Gross Profit before Tax
Turnover
GPM
2012
41289
83680
49.34%
2011
41791
82559
50.62%
2010
41019
78939
51.96%
2009
40131
79029
50.78%
GPM comparison between P&G and Reckitt Benckiser
Company
Gross Profit before Tax
Turnover
GPM
P&G 2012
41289
83680
49.34%
Reckitt Benckiser 2011
5662
9485
59.70%
Net profit margin and Gross profit margin are two key aspects in profitability analysis. There is a constant decrease in P&G's percentage of Net profit margin from 2009 till 2012 (refer table 1), whereas the Gross profit margin of P&G has increased from 50.78% in 2009 to 51.96% in 2010 and thereafter it has seen a decrease till 2012. The decline in GPM is due to the competition in the market. P&G's competitor Reckitt Benckiser has seen decrease in both NPM and GPM (refer table 1). The trading profit for Reckitt Benckiser is quite higher (59.70%) than P&G's (49.34%) last financial year. Summarizing the found out details, the net profit margin and the gross profit margin of Reckitt Benckiser is quite good when compared to P&G.
Graphical representation of Profitability Analysis - P&G
Graphical representation of Profitability Analysis - Reckitt Benckiser
2.2. Solvency Ratio
Table 2 Solvency ratios for P&G and Reckitt Benckiser
P&G
Reckitt Benckiser
Year
2009
2010
2011
2012
2010
2011
Current Ratio
0.71:1
0.77:1
0.80:1
0.88:1
0.46:1
0.52:1
Acid Test Ratio
0.49:1
0.51:1
0.53:1
0.61:1
0.35:1
0.38:1
The solvency portion consists of two ratio analysis. They are
2.2.1. The Current Ratio
The current ratio = Total current assets
Total current liabilities
The Current Ratio calculation for P&G
Year
Total Current Assets
Total Current Liabilities
The Current Ratio
2012
21910
24907
0.88:1
2011
21970
27293
0.80:1
2010
18782
24282
0.77:1
2009
21905
30901
0.71:1
The Current Ratio comparison between P&G and Reckitt Benckiser
Company
Total Current Assets
Total Current Liabilities
The Current Ratio
P&G 2012
21910
24907
0.88:1
Reckitt Benckiser 2011
2938
5700
0.52:1
Ratios are calculated between the "total current assets" and "total current liabilities". The thumb rule for current ratio is that: if the assets are more than the liabilities, then the company will be in a strong position and the short term debts can be cleared quite comfortably. Current ratio for P&G is increasing each year even though the assts are lesser than the liabilities (refer table 2). Reckitt Benckiser assets is nearly half of its liabilities in , which means the company might not be able to clear their short term debts that easily as of P&G (refer table 2)
2.2.2. The Acid Test Ratio
The Acid Test ratio = (Total current assets - stock)
Total current liabilities
The Acid Test Ratio calculation for P&G
Year
Total Current Assets less stock
Total Current Liabilities
The Acid Test Ratio
2012
15189
24907
0.61:1
2011
14591
27293
0.53:1
2010
12398
24282
0.51:1
2009
15025
30901
0.49:1
The Acid Test Ratio comparison between P&G and Reckitt Benckiser
Company
Total Current Assets less stock
Total Current Liabilities
The Acid Test Ratio
P&G 2012
15189
24907
0.61:1
Reckitt Benckiser 2011
2180
5700
0.38:1
This ratio is almost same as the previous one and the comparison is done between the total current assets less the stocks and the total current liabilities. Both P&G and Reckitt Benckiser are having very low acid test ratio of 0.61:1 and 0.38:1 respectively (refer table 2). So this implies that both the companies are having fewer assets to pay their short term debts.
2.3. Efficiency
Table 3: Efficiency Comparison between P&G and Reckitt Benckiser
P&G
Reckitt Benckiser
Year
2009
2010
2011
2012
2010
2011
a) Debt Collection Period
27
25
28
26
59
56
b) Creditor Payment Period
57
70
72
68
288
277
c) Rate of Stock Turn over / Stock turn
5.65
5.94
5.52
6.31
5.89
5.46
2.3.1. Debt Collection Period
Debt Collection Period = Debtor * 365
Annual credit sales
Debt Collection Period calculation for P&G
Year
Debtors
Annual Credit Sales
Debt Collection Period
2012
6068
83680
26 Days
2011
6275
82559
28 Days
2010
5335
78938
25 Days
2009
5836
79029
27 Days
Debt Collection Period comparison between P&G and Reckitt Benckiser
Company
Debtors
Annual Credit Sales
Debt Collection Period
P&G 2012
6068
83680
26 Days
Reckitt Benckiser 2011
1442
9485
56 Days
Debt collection period refers to the time taken by the debtors to pay back to their respective companies. Lower the debt collection period is the better for the company. There was a small dip in the debt collection report for the past four years. The debt collection period for P&G in the year 2009 was 27 days and it became 25 days in the year 2010 (refer table 3), again there was an increase in the middle(2011) and there was a minimal decrease with almost 27 days for collecting the debtors amount in the last year(2012). The debt collection period for Reckitt Benckiser is more than twice of P&G's which is not a good sign (refer table 3).
2.3.2. Creditor Payment Period
Creditor Payment Period = Creditors * 365
Annual credit sales
Creditor Payment Period calculation for P&G
Year
Creditors
Annual Credit Purchases
Creditor Payment Period
2012
7920
42391
68 Days
2011
8022
40768
72 Days
2010
7251
37919
70 Days
2009
5890
38898
56 Days
Creditor Payment Period comparison between P&G and Reckitt Benckiser
Company
Creditors
Annual Credit Purchases
Creditor Payment Period
P&G 2012
7920
42391
68 Days
Reckitt Benckiser 2011
2901
3823
277 Days
Creditor payment period is the money payable to the suppliers. Lesser the days, easier to sustain a better relationship with the suppliers. The creditor payment period took a see saw ride in the last four years starting from 56 days in 2009 to 70 days in 2010, then it was 72 days in 2011 and last year it was 68 days (refer table 3). The creditor payment period is too long for Reckitt Benckiser because its taking over 9 months in the last two years and the recent being 278 days in the previous year (refer table 3).But, it also provides an opportunity for the company to retain cash for its operation if the creditor payment period is more, which is good in some situations.
2.3.3. Rate of stock turnover
Rate of Stock Turnover = Cost of sales
Average stockholding
Stockturn calculation for P&G
Year
Cost of Sales
Average Stockholding
Stockturn
2012
42391
7050
6.01
2011
40768
6881.5
5.92
2010
37919
6632
5.72
2009
38898
7648
5.09
Stockturn comparison between P&G and Reckitt Benckiser
Company
Cost of Sales
Average Stockholding
Stockturn
P&G 2012
42391
7050
6.01
Reckitt Benckiser 2011
3823
702
5.49
This is calculated by the number of stocks sold over a year. In other words, quicker the inventory is sold, better it gets for the company. P&G has a good Stock turn last year for selling stocks more than 6 times in a year which is a shade better when compared to Reckitt Benckiser's stock sold for more than 5 times a year (refer table 3).
Graphical representation of Efficiency Analysis - P&G
Graphical representation of Efficiency Analysis - Reckitt Benckiser
2.4. Investor Suitability
P&G
Reckitt Benckiser
Year
2009
2010
2011
2012
2010
2011
b) Capital Gearing
24.65
25.79
24.47
24.76
0.05
0.05
c) Earnings Per Share
4.26
4.11
3.92
3.71
2.17
2.4
d) Dividends Per Share
1.6
1.76
1.92
2.09
1.15
1.2
e) Yield
3.21
3
3.1
3.48
3.26
3.77
F)Price/Earnings Ratio
13.6
16.22
15.4
16.1
16.24
13.25
Table 4: Investor Suitability comparison between P&G and Reckitt Benckiser
2.4.1. ROCE: Return On Capital Employed
Calculation for ROCE is done in profitability analysis section (refer section 2.1.1). The ROCE of P&G is almost 25% lesser than that of Reckit Benckiser which implies that Reckitt Benckiser has greater EPS in comparison with P&G.
2.4.2. Capital Gearing
Capital Gearing = Long term debt* 100
All finances
Capital Gearing Ratio calculation for P&G
Year
Long-Term Debt
All Finance
Capital Gearing
2012
21080
85114
24.76%
2011
22033
90034
24.47%
2010
21360
82799
25.79%
2009
20652
63099
24.65%
Capital Gearing Ratio comparison between P&G and Reckitt Benckiser
Company
Long-Term Debt
All Finance
Capital Gearing
P&G 2012
21080
85114
24.76%
Reckitt Benckiser 2011
300
5784
0.05%
It's used for calculating the loan amount for each company for their share of investment. If the gearing ratio is less than 25% then the risk is pretty low in terms of borrowing, if it's more than 50% then the risk is very high. The capital gearing for P&G has been mostly 25% in the last four years expect in 2010 as it was close to 26% which means the risk is low (refer table 4). Reckitt Benckiser has a gearing ratio which is almost 0% which implies there are no loans for the company and also suitable in all aspects (refer table 4)
Graphical representation of Capital Gearing - P&G
Graphical representation of Capital Gearing - Reckitt Benckiser
2.4.3 Earnings per Share (EPS)
Earnings per Share = Annual Earnings (Profit after tax)
Number of issued Ordinary shares
Earnings per share are generally measured by the company's profit upon their total shares. P&G are having a constant decline in their EPS every year, EPS was 4.26 in the year 2009 and it has dropped to 3.71 (refer table 4) in the last financial year. Whereas Reckitt Benckiser's EPS has increased last year by a minimal margin from 2.17 to 2.4 (refer table 4).Hence in the last financial P&G are having a better earnings per share (£3.71 per share) in comparison with Reckitt Benckiser (£2.4 per share)
2.4.4 Dividend per share (DPS)
Dividend per Share = Dividends
Number of issued Ordinary shares
DPS indicated the total dividends which are paid to the investors. Dividend per share is increasing for P&G from 1.6 (FY2009) to 2.09 (FY2012) (refer table 4) and a very minimal increase for Reckitt Benckiser from 1.15 (FY2010) to 1.2 (FY2011) (refer table 4)
2.4.5 Yield
Yield = Latest ordinary dividends
Current market share price
Yield is the percentage between latest ordinary shares to the current market share price of the company. This determines the cash return for the company by maintaining a constant dividend. P&G's yield in 2009 was 3.21%, then it fell to 3% in 2010, increased gradually to 3.1% in 2011 and almost 3.5 in 2012 (refer table 4). Reckitt Benckiser's yield has risen from 3.26% in 2011 to 3.77% in 2012(refer table 4). Therefore yield ratios for both the companies are more or less the same with Reckitt Benckiser being slightly more than P&G's
Price/Earnings Ratio
P/E Ratio = Latest market share price
Latest earnings per share
Price per earnings ratio is calculated by dividing the latest market share price to latest EPS. Earnings ratio had a great increase in 2010 from 13.6 to 16.22 (refer table 4), then it was decreased in the next year to 15.4 and increased in the last financial year to 16.1. Reckitt Benckiser on the other hand had a drastic decrease in the earnings ratio in the last financial year from 16.24 to 13.25 (refer table 4). Even though there is an increase in the earnings ratio for P&G, it's not really optimistic among the investors since the ratio is quite less. The earnings ratio is less for Reckitt Benckiser also
Graphical representation of EPS, DPS, Yield and P/E Ratio - P&G
Graphical representation of EPS, DPS, Yield and P/E Ratio - Reckitt Benckiser
Analysis of P&G shares as a potential investment
There can be broadly two types of investors.
Short-term investor (Traders)
Long term investor (Investor)
For investing in a company shares there are many factors that can influence the decision of an investor. An analysis of few factors can really bring value to the decision made and for that the following basic factors should be considered.
Profits made by the company in previous financial year
Latest Dividends payouts, Dividend Yield and Dividend Cover
Total Net Assets/Valuation of the company
Cash Flows
β (Beta) Value of the share
EPS (Earnings per Share) or Shareholders return
Profits made by the Company (Years ended June 30th):
As it is evident from the data above, the profit in Millions earned by the company has continuously depreciated over the years with the greatest decline in the year 2012 worth 1041 Million $ in comparison to the year 2011.
The Return on Capital Employed (ROCE):
As it is evident from the data above, the Return on Capital Employed has seen an exceptional decline in the year 2011 and 2012. The return earned on the capital employed in year 2012 has declined up to 10.5% in comparison to the return earned on the capital employed in year 2011.
Based on the analysis of both Profit and ROCE above, the area of concern is that, why there is a decline in the above two data's and there must be an influencing factor which has created this declining trend.
Though the Revenue or Net Sales of the company has seen a continuous increase since 2010 but at the same time there is a consistent increase in the operating expenses incurred by the company each year which is responsible for the substantial decline in the annual profits earned by the company. The probable reasons for the increased (OPEX) operating expenses are due to macro and micro economic factors. Major macro-economic factors include increased price of commodities and fuel prices. Also by the change in currency prices, government regulations on trade & tax and certain geographic regions which were not beneficial. Micro-economic factors include factors involved with the company such as increased expenditure in research & development and marketing/advertising as per the latest annual report.
To overcome these difficulties, company has increased the price across different segments of its businesses to compensate the increased price of goods and currency.
Overall, though the company has shown decline in Profits and ROCE, yet it has shown increase in the Net Sales/Revenue even in unfavourable economic conditions which shows company's positive strategy, outstanding performance and strong fundamentals, which can generally lead to good return for its investors.
B)
Dividends
Trend of market price of P&G shares from July 2009 to June 2012C:\Users\user\Desktop\2009-2012 share price of P&G.png
The Dividends per share given by the company to its shareholder's every year since 2009 till the current year has been attractive as the amount has been increasing every year, which is good news from an investor's point of view. Likewise, the pattern for dividend yield for the past three years has been following an upward trend in terms of percentage. The reason for the increase in the yield is because of fall in the prices of the shares from 2011 to 2012 with a substantial amount with respect to the slight increase in the Dividend per share; therefore with fall in share prices and the dividends per share increasing with a slight amount (Yield = latest ordinary dividend/ current market price of share), the Dividend Yield rose.
For an investor looking for good annual dividend payouts year by year on the investment made, the company shares must be preferred.
Dividend Cover
Though the company's Dividend per share and Yield looks attractive, however the risk involved in dividend paid out must also be considered i.e. whether the payout is secure or not, which is called as the dividend cover
Generally the dividend cover is calculated simply by
(Total Net Profit / Dividend paid out) or Earnings per share divided by Dividend per share (EPS/DPS)
Year 2009
Year 2010
Year 2011
Year 2012
Total Net Profit
13436
12736
11797
10756
Total Dividend Payout
5044
5458
5767
6139
Dividend Cover
2.66
2.33
2.04
1.75
As from the dividend cover ratio, it can be analysed that value of dividend cover is continuously decreasing year by year with the maximum decline of nearly 14% in the year 2011-2012. For the year 2009-2010 the ratio decreased by 12.4% and for 2010-2011 it decreased by 12.44%. This decrease in the dividend cover is an indicator that the company is distributing more amount from its earned profits, which means that the dividends are not adequately backed up by the earned profits and this can be a little unsecure dividend payout.
For an investor who is more oriented towards particular dividends is more likely to adhere to this ratio whereas an investor who prefers a smaller payout with a long-term increase in share market price will not adhere to this ratio.
C) Net Assets and Growth of the Company
The Total asset of the company has seen ups and downs in the years above. The latest Total Assets has seen a decline due to the expense incurred by the company towards Research and Development accounting to $2029 million for innovations leading to launch complete new categories. P&G has also been in the category of Tier 1 sponsor of the 2012 London Olympics and 150 athletes were sponsored by them.
The company sold its snack food business 'Pringles' to Kellogg's and terminated its food business to concentrate more towards its core business area.
With all the assets and their allocations P&G's prospects look good and the demand for shares in the market is always there no matter what the economic influence be globally.
Investor Suitability
Investor Suitability
Revenue
Profit
Dividend
Yield
EPS
P/E
Year
million $
million $
$ per share
%
$ per share
Years
2009
79029
13436
1.6
3.21
4.26
13.6
2010
78938
12736
1.76
3
4.11
16.22
2011
82559
11797
1.92
3.1
3.92
15.4
2012
83680
10756
2.09
3.48
3.71
16.1
The decline in the Profits and EPS of the company are interrelated.
Earnings per share or EPS are the earnings which are made from the share of the company's profit per common share or stock. As the Profit from the Year 2009 to Year 2012 has continuously decreased with the highest decrease of nearly 8.8 percent from 2011-2012; and therefore the EPS has also decreased with the highest decrease of nearly 5.4 percent from 2011-2012.
Despite of decreased company's profit and EPS, the dividend payout has been attractive and increasing throughout the year which is good news for its investors. This will also act as a key factor in influencing potential investors to invest in the stock as a better bet.
P/E Ratio and EPS are interrelated.
P/E Ratio is dependent upon latest EPS to the latest price of stock in the market. Since EPS has decreased from 2011-2012, hence the P/E ratio has increased a bit relatively. Low P/E Ratio is considered better. As Price to Earnings ratio helps in anticipating future prospects of the company and in valuation of the stock as good investment; it still needs relevant figures to support the facts.
REVENUE & COST OF SALES:
2009
2010
2011
2012
Revenue in Million ($)
79029
78938
82559
83680
Change in Percentage %
- 3.326 %
- 0.115 %
+ 4.587 %
+ 1.357 %
As it is evident from the data above that there has been an increase in the percentage of Revenue earned by the company from the previous two years. Also the cost of sales has increased with the increase in Revenue over the last two years due to the change in the market economy. Even though the cost of sales has increased over years due to increasing cost of goods and currency, yet, their overall Revenue has increased because of the effective pricing strategy to increase the price of products within all segments of business to compensate for the increased price of goods and currency.
The Profit's can be increased by focusing on several factors, but the initiative of P&G to improvise upon cost saving and to build a cost focused tradition in the company, which is targeted on $ 10 billion savings on the cost over a period of next 5 years, is the one of the most sought out. This can really turn profits of the company favourably towards them with an increase in the margin of profit between Net Sales and Cost of Sales; which in turn will result in better returns to the investors in the coming years.
Share Price and other related information for Investor
C:\Users\user\Desktop\Accounts and Finance\share price compared to RB 2009-2012.png
As it can be seen from the graph, the Share price of P&G is relatively higher than that of its competitor Reckitt Benckiser. P&G's 52 week Range of share price was bottomed at 59.07 to highest at $70.83 for the period July 2011 to June 2012 [Source: http://finance.yahoo.com]
"Low dividend yields are mainly the result of high share prices." (Robert Perks and Danny Leiwy, 2010). From the above graph for share prices and the dividend yield data for P&G and Reckitt Benckiser for the year 2011-2012
P&G
Yield=3.48
Share Price (as on 29th June 2012) = $60.65
Reckitt Benckiser
Yield=3.77
Share Price (as on 29th June 2012) = $33.65
[Share Price source: uk.finance.yahoo.com]
Clearly the value of Low Dividend yield of P&G is mainly because of the high share price and the vice-versa for Reckitt Benckiser, so the above statement from Perks and Lewis stands out to be true
BETA (β) Value of the Stock
With all the suitable data available for an investor, the final decision which should be considered is the Beta (β) value of the share.
What exactly is the Beta (β) Value?
Generally the Beta (β) Value of the stock is presumed to be the number indicating the volatility of the stock in comparison to the volatility of the market or index it is being compared to.
[Source: http://en.wikipedia.org/wiki/Beta_(finance)]
The calculation of Beta is made using the formula below
"Beta = Covariance (stock versus market returns) / Variance of the Stock Market"
[Source: http://in.answers.yahoo.com/question/index?qid=20070705084613AAh0qd2]
If 0 < β < 1, the volatility of the stock is similar to the market, but the movement/reaction of stock is relatively less. (Low Beta Stock, Risk involved is lower)
If β > 1, the volatility of the stock is similar to the market, but the movement/reaction of stock is relatively more. (High Beta Stock, Risk involved is higher)
Generally the β Value for the Market is assumed to be 1, i.e. β = 1 for Stock market
Investors who aspire for higher returns usually prefer High Beta Stock which involves high risk whereas Investors who aspire for steady returns, keeping their capital safe usually prefer Low Beta Stock.
By using the above formula for Beta Calculation; the β value is calculated for the last two months of the year ended June 30th 2012.
P&G
FTSE 100
Date
Adj Close
Returns
Date
Adj Close
Returns
Beta (β)
01-06-2012
60.23
-0.01665
01-06-2012
5571.1
0.047022
0.264241
01-05-2012
61.25
-0.02125
01-05-2012
5320.9
-0.07266
0.286611
[Historic data for P&G and FTSE 100 from http://uk.finance.yahoo.com]
Using the data from the above source and, putting them in the formula resulted in the Beta (β) Value for the last two months of the year ended June 30th 2012.
Based on the β Value, it can easily be identified that the β value is low and therefore the risk involved in also lower. Thus the share is a low risk share and it is safe for investment with the possibility of good returns in the future for its investors along with good fundamentals and cost saving strategies in future.
Every Investor should have Low Beta Stock like P&G in their portfolio, with low risk and strong fundamentals and the ability to give good returns to its investor and at the same time keeping their invested capital safe and at lower risk.
If the β would have been greater than 1, then the recommendation would be different as it involves risk, but a stock like P&G should be in the portfolio of both short-term (usually called traders) and long term investors as it will keep the investment safe and would possibly result in good returns. Keeping 50-60% of one's capital safe in low beta stocks with strong fundamentals like P&G, one can use the bullish approach for high beta stocks, resulting in a perfect mix of stocks in their portfolio.
Even with all the information discussed above, if one is not able to make his/her investment decision in the P&G stocks, then they can follow the World's biggest and one of the most successful investor Warren Buffett. "Four high yield stocks from Warren Buffett's Portfolio include P&G as per a report".
[Report from: http://beta.fool.com/insidermonkey/2012/11/22/four-high-yield-stocks-warren-buffetts-portfolio/17054/?ticker=PG&source=eogyholnk0000001 ]
SOURCES OF FUNDS
Source of funds is one of the most vital segments in an organization that helps the management take critical decisions during a financial year. Source of funding in an organization can be categorized into internal sources and external sources. Retained earnings, sold assets and capital investment come under internal sources. External sources include borrowings, debts (Long-term and Short-term) and share holder's equity. P&G's source of funds can be categorized and organized as follows:-
INTERNAL FUNDS
Retained Earnings
It refers to the portion of the net-profit held back by the company without disbursing the amount as dividends to the shareholders, but reinvested in its operating businesses or to pay back debts. (Turnovsky, 1967).The retained earnings for 2012 is $75,349 million while it is $70,682 for the year 2013.There has been a climb of 6.19% in the retained earnings in one year. Employee Stock Ownership Plan (ESOP) has been one of the prime investments of Procter & Gamble from the retained amount.
Discontinued Operations
During May 2012, Procter & Gamble accomplished the sale of global snack business assets to the Kellogg Company for $2.7 billion liquid cash. Within their contract terms, Kellogg attained P&G's patented snacks products, manufacturing services in Belgium and the United States and also acquired most of the workers employed at snacks business. The profit after tax was $1.4 billion inclusive of the net earnings from discontinued operations. Snacks business then fell under the discontinued operations category and also has been taken off from continuing operations as well as from segment results. Similarly in 2009, Global Pharmaceuticals business was taken over by Warner Chilcott plc for the amount of $2.8 billion and also attained P&G's copyrighted pharmaceutical products, drug products and manufacturing services in Puerto Rico and Germany. Then Warner Chilcott plc transferred most of the employees from Procter & Gamble to their company. There have been no discontinued operations during the financial years of 2011 and 2010. The profit after tax was $1.5 billion inclusive of net earnings from discontinued operations, eventually pharmaceutical business was taken away from continued operations and also from segment results. There has been a boost of $1.4 billion in 2012 for the net earnings in discontinued operations because of the sale of global snack assets. Diluted net earnings per share saw a decrease of 7% from last year to $3.66 in financial 2012.
Cash and Cash Equivalent
The year 2012 has cash equivalents worth of $ 4,436m.This has seen an enormous increase of 37% compared to 2011 where it is $2768m.Normally, the raise in the cash equivalent is the result of money not being invested into any profitable projects or operations. Referring to the Procter & Gamble annual report 2012, it appears from the consolidated statements of cash flows that there is extreme shrink in the investments by 68.6 % during the financial year 2012.One of the major reasons for less investment in 2012 is due to the cash inflow from the sale of snack business which is $2893m and the total inventory investment going down by 8.9% from the total current assets. The liquid cash and cash equivalents thus provide the source for funds for the investment and the organization's inventories. The discretionary investment and the riches to be transferred to pay off the dividends will again come from the firm's cash flow, this expenditure is called the free cash flow, which is nothing but entire cash flow with a reduction of capital expenditure. This aspect has gone for a dip of 7% because of expenditures on the working capital in terms of geographic extension of the organization resulting in less investment in operations.
EXTERNAL FUNDS
Borrowings
Total debt decreased in the last financial year from $32 billion in 2011 to $29.8 billion in 2012. This decrease is because of the maturity level of bond and also reducing the business-related paper outstanding. Funds are mainly used in the investments and financial plans like repurchasing the shares and also for acquisitions.
Capital Lease
Capital lease is a form of lease where in accounting it is considered that the firm has actually purchased the asset. The capital lease of Procter & Gamble has only 0.5 % of its contribution to the whole long term debts. Hence, it is not measured as a major component of the funding sources.
Shareholder's Equity
From the entire outstanding common stock from 2011, Procter & Gamble has re-purchased 1,242 common shares which now come under treasury stocks in the consolidated balance sheet. This action has added worth to the share premium factor which is nothing but the additional paid-in capital. Even though this activity affects the retained earnings as the stocks are bought from the liquid cash, the retained earnings in 2012 has seen an increase of 6.19% from 2011 as a result of money coming from snack business which would next be a part of discontinued operations. Procter & Gamble has increased the dividend payment on common shares in 2012 and the number of common shares issued is same as the previous year. But, still there is a decline of 5.8 % in total shareholder's equity in 2012 compared to the previous year which is due to the increase in the comprehensive accumulated loss as seen in the balance sheet.
Total Sourcing of Funding.
As we can draw from the graph, Procter & Gamble has managed to strike a sense of balance in terms of categorizing the total source of funds, which is appreciable.
Deepak
Corporate Governance of Procter & Gamble:
Corporate governance is a kind of system which is used to direct and control companies. Increase in standard of corporate governance of companies would lift the performance of companies and vice-versa. The responsibility of corporate governance should exists with both the companies and the investors and there are certain procedures accepted as a good practice of corporate governance such as trustworthiness of actions that management and boards decide upon, transparency and better quality of reporting.
Let us discuss about the corporate governance practiced by Procter & Gamble. Procter & Gamble is truly a global company with their products sold in 180 countries and as defined in their own corporate governance guidelines and as per rules of the securities exchange commission; the company has to maintain their transparency and honesty in doing their operations worldwide. The corporate structure and corporate governance of Procter & Gamble have helped them double their profitability by focusing on consumers, brands and also the competitors.
Corporate Structure of Procter & Gamble:
The corporate structure of Procter and Gamble involves Market Development Organizations, Global Business Units, Global Business Services and Corporate Functions.
Global Business Units (GBUs) gives more concentration to the consumers, brands and competitors around the globe. Most of their innovations, profitability and the shareholder returns are the responsibility of Global business Units.
The Market Development Organizations were expected to do the research about the consumers and the retailers with which P&G competes and also responsible for the innovations developed by the Global Business Units to integrate into the business plans according to each country.
Global Business Services (GBS) consumes the employees' endowment and use the experts' opinions to offer best business support services at the lowest cost to drive them to earn more profit.
GBS - Centralized: 1 services organization, Global: 6 hubs in low cost locations, Holistic: 170+ business and employee services, Collaborative: Strategic Partners
Lean Corporate Functions, strictly measure the functioning of innovations and helps in continuous improvement.
Fig: Below is the model of corporate structure that the company is using for more than a decade.
Corporate Governance:
Structure of Board and Effectiveness:
The board members are the representatives of the shareholders, acting on behalf of them. At present there are eleven members as the board of directors of P&G, and according to the company's corporate governance guidelines, members are totally responsible for approving and monitoring the company's financial strategies. Furthermore, they are the key players in monitoring internal controls, recruiting and setting the remuneration for chief executives, and manage the risk facing the company. Board of directors is also responsible for maintaining the quality and accuracy of financial reports.
The chairman of the company's board is elected by the non-employee members of the board and they also have the authority to remove the chairman by same voting method. Interestingly, in P&G, the chairman and the chief executive officer are the same person, Mr Robert A. McDonald. Normally, Board meets 7 times in a year and the agenda for the meeting were decided either by the Chairman or the Presiding Director and all board member can suggest any additional agenda to be included for the discussion. Procter & Gamble Company has a most diversified board members, 5 of 11 board members are women.
Board members compensations are the responsibility of 'Compensation & Leadership Development Committee', which considers the qualifications and salary would be the benchmark among the companies of similar size in U.S.
Continual education is provided to the board members of their interest, and also advice to attend the third party experts' presentations. All board members either employee or non-employee are required to own a common stock of the company. All the employees in the organisation are issued with the company's, thereby increasing the employees interest on the economic growth of the organisation.
The Board is self-evaluated by the 'leadership of the Governance & Public Responsibility Committee'; this Committee would appoint an independent governance specialist to ease the assessment and the results would be discussed by the board members to take action.
Independence of the Board member is periodically assessed with the standards of New York Stock Exchange. Once in a year the board members independence is examined, to ensure the effective functioning of the board.
Internal control -Management's auditing report:
As per the Securities Exchange Act of 1934, the company is following the internal control auditing of financial report. As per their corporate governance policy, they follow the audit committee guideline to determine the expertise of the audit member by the level of accounting and financial education, past experience and the ability to intellectually and independently audit the company's financial report. Ms. Patricia A.Woertz (Chair) and Mr. Kenneth I. Chenault are the audit committee financial experts for 2012 financial year.
The final report is assessed by following the 'Internal Control-Integrated Framework' specified by the 'Committee of Sponsoring Organizations of the Treadway Commission (COSO)'. It evaluates the realistic declaration that transactions are done as formal and appropriately recorded, that assets are secured and that accounting files are adequately dependable to authorize the preparation of financial statements compliant in all respects with accounting policies widely accepted in the U.S.A.
The effectiveness of internal control auditing is assessed by an independent auditing firm, as of June 2012, Deloitte & Touche LLP, has recently done the financial report auditing of P&G.
They continuously examine these internal controls via control self-assessments, which is the responsibility of business unit management. In addition to that the company's 'Global Internal Audit organization' offers training to continuously improve the internal control processes. Suitable measures are taken by management to identify and control the deficiency.
An excerpt from the report of independent registered public Accounting firm, Deloitte & Touche LLP. They carried out the auditing based on the Standards of Public Company Accounting Oversight Board of United States of America. From their analysis of the internally audited financial report, as a result of auditing the company's 2012 financial report, Deloitte & Touche LLP has confirmed that they have an effective internal control for financial reporting and they have dully internal control-frame work of COSO and they expressed that the company is following good practice of financial reporting as per the regulations.
Risk Management Activities of P&G:
Since the company is having its presence in various countries and still expanding with range of product offerings to customers which are open to the elements of risk. Procter & gamble is already aware about the risks like market risks, credit risks, Foreign Exchange risk, and interest rate risk and they do continuously developing strategies to tackle it.
Credit Risk Management:
Following the economic crisis of 2009, the risk of unexpected financial loss to the counterparty has increased, so Procter & Gamble has setup counterparty credit guidelines, which periodically monitors the counterparty credit ratings. Also the company has made close netting and collateral agreements with the counterparty company which supports them to deal with these risks.
So far, the company has not incurred in any of such risks and expecting it the same in future also.
Interest Rate Risk Management:
The company is following a strategy of using the mix of both the fixed-rate and variable rate debt to manage the interest cost. They have implemented the interest rate swaps to manage the interest rate risks in a more cost effective way. This would be a perfect move to prevent the risks involved in interest rate increases, but at the same time P & G could not be benefited if the interest rate decrease, it has to stick with the same rate of interest.
Foreign Currency Risk Management:
Due to the globalisation and economic crisis, the currency of most of the countries in the world fluctuates and most of the importer prefers buying in their own currencies. P&G as a multinational company purchases raw materials from various countries and they have a major market share of entire world. So, the currency fluctuation would have an adverse effect on the financial condition of the company.
Liquidity: Stable outlook
The company has made agreements with many financial organisations to fund the company's short-term financial needs. As on June 30, 2012, the company's has been voted as having both with a stable outlook, short-term credit ratings were P-1(Moody's) and A-1+ (Standard & Poor's), while our long-term credit ratings are Aa3 (Moody's) and AA- (Standard &Poor's).
Finally, most of the above risks are insured by the company where possible. So, overall risk management of the company is functioning effectively well according to the accounting and governance guidelines.
Controversies about P&G's Corporate Governance:
Even though they have very strong corporate governance, we would like to discuss few recent controversial activities that P&G has involved in.
On March 2011, Mr. Rajat Gupta, a senior member of the Board was accused by U.S. Securities exchange commission, for insider trading. He shared some confidential information about Procter & Gamble's forecasted sales increase with Galleon group, a hedge fund management firm. This kind of activity is completely against their code of corporate governance.
Most recently, on October 2012 he got sentenced for 2 years in prison and a fine of $ 5 million, which proved that insider trading, has really happened.
On April 2011, P&G was found to be involved in the price fixing-cartel in European Union together with the Unilever and Henkel. P&G was fined 190 million Euros.
Accounting & Governance Risk analysis of Procter & Gamble:
The accounting and corporate risk analysis is based on using of statistical tools to evaluate the factors of these risks and lower the score higher the risk and vice-versa. Procter & Gamble is positioned at 29th percentile among the other companies, this indicates high corporate integrity risks and there is a future possibility of litigation and financial restatements.
http://images.forbes.com/feeds/currencies/agr/chart/7280N-201.png
Sources: http://finapps.forbes.com/finapps/AccountingRisk.do?tkr=pg
RISK
AGR® IMPACT
TOP ISSUE
Corporate Governance Events
34.4
Consecutive quarters of EPS Growth
High Risk Events
29.6
Share Repurchases
Asset-Liability Valuation
36.0
Goodwill/Total Assets
Sources: Adapted from- http://finapps.forbes.com/finapps/AccountingRisk.do?tkr=pg
Hence, Procter & Gamble is at its best in following the code of governance and policies. They give significant importance to the practices that would ensure well-being of the assets of the organisation and the shareholders. Even though the company has faced few controversies in the past, they are attentive of tackling any situations, also the boards strong control action and the risk management activities also found to be more effective and satisfactory. Overall, they have a strong internal control strategies and the ability to manage the risks under uncertain situations.
