Procter & Gamble Earnings Preview: Pricing Power To Offset Rising Cost Pressures

The Cincinnati, Ohio-based company is among the global businesses facing an array of headwinds in the post-pandemic environment, such as supply chain disruptions and escalating costs. 

However, data indicates that the company should be able to soften the inflationary blow through its pricing power, easing the pressure on PG's bottom line from higher costs and supply constraints.

In the quarter that ended on Dec. 31, P&G implemented its most significant average price increases since the spring of 2019. According to company executives, price increases will continue throughout 2022, which could translate into higher profitability and improved margins in coming quarters even as labor, freight, and raw materials costs keep accelerating.

The maker of Tide detergent and Downy fabric softener could face a $2.8 billion impact on sales in its fiscal 2022, which ends in June, up from $2.4 billion projected in November. With these pressures, P&G now expects full-year organic sales growth of 4% to 5%, compared with an earlier projection of a 2% to 4% increase. 

This improved outlook also shows that demand for P&G products—in categories such as clean home, health, and hygiene—remains resilient, with consumers willing to pay the higher costs. 

Inflation in the company's home market, the US, is running at the highest level in four decades as pandemic supply-and-demand imbalances pushed up prices on everything from used cars to household staples.

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Pricing on average rose 3% for P&G consumers in the previous quarter, and price increases accounted for half of the company's revenue growth in the period. Higher volumes accounted for the other half.

PG's shares have proven a good hedge in this volatile economic environment. Helped by a solid Q2 2022 earnings report in January, the stock fell just 3%, about half that of the benchmark S&P 500 Index. 

Raymond James, in rating Procter & Gamble as outperform, said in a note this month:

"While the backdrop for consumer staples has grown more challenging as the market assesses growth and inflation post-pandemic, we believe PG's improved ability to navigate volatility, cushion itself against costs with its own initiatives, and focus on innovation position it well to sustain its momentum."

The company is also well-positioned to deal with commodity inflation due to its solid and diversified product portfolio. 

During the past five years, P&G has innovated in marketing and simplified its organizational structure while cutting its roster of brands from 175 to 65, focusing on the 10 product categories where margins are highest. 

The company has also eliminated 34,000 jobs through brand sales, buyouts, and plant closures during that process, slashing more than $10 billion in costs. 

P&G stock remains our favorite pick from among the packaged consumer goods companies. It's one of the largest dividend payers in the US—distributing $3.65 per share annual dividend for a yield of 2.33%—and with 65 years of dividend increases, it has a payout track record that's hard to match.

We see little reason to abandon this consumer powerhouse, even if its stock goes through a rough patch in the current inflationary environment.