Procter and Gamble (PG, Financial), the consumer products giant is one of the best stocks available in the market today in terms of dividends and growth. Being a dividend aristocrat, P&G has always been one of the top preferences for investors who are looking for a good return on their investments. With a 3% dividend yield, the company recently stepped into its 58th consecutive year of dividend increases. While all these factors work strongly in favour of the company, there are certain points that investors should note when they invest in P&G. The coming years have some challenges for P&G and one can only wait and watch if the company will be able to overcome these, with its current style of functioning. Some of the points that could pose a problem for P&G are described below.
Massive downsizing
Recently, the top management of P&G announced that the company would bring down the number of its brands by a great extent. As one of the key moves towards effective cost management, P&G recently cut off close to 100 small brands that were doing reasonably well in the market. At present, there are only around 80 important brands of the company floating in the market. While on one hand, it could be argued that the company has taken the right step towards effective management of brands, on the other hand, it could also mean that there would be limited growth opportunities for the company. Big and established brands have their market shares in place in both developed and emerging markets. It is the small brands that have huge avenues of growth in smaller markets and by stopping these brands, P&G has literally applied the brakes on its pace of growth. Investors should now expect the company to grow at a much slower pace than it did during the previous years. Some of the key brands that the company will focus on exclusively in the future are Tide detergents and Pamper diapers.
Lack of investment in R&D
It cannot be denied that P&G is one of the market leaders in consumer products; however, what is worrying is that, of late, the company has not been concentrating much on research and development. There is a serious problem with respect to product innovation is concerned and this can be understood from the fact that the last new brand from the company came sometime during 1999. During the early 2000s, the company was involved in many breakthrough products that changed the way people viewed it. During this time, close to 5% of revenues were invested in R&D. By the year 2011, this rate dropped to 2%. Ever since it has outperformed its peers in the consumer product sector, P&G has been underplaying to its potential, which is quite a surprise considering the fact that this was the very company that created many revolutions in consumer products ten to fifteen years back. This lag in innovation could hurt P&G in the long run, especially when its peers start coming up with newer products in the market.
Change in management
One of the persons who were the pillars of P&G’s success during the 2000s was the then CEO. He is now 68 and P&G has still not come out with a formal announcement about his successor. Bob McDonald, who replaced him for a brief while, could not bring back P&G to its original glory and did quite a bad job in helping P&G sustain in the market post the huge recession. Currently there have been some internal candidates shortlisted for the coveted position; however until P&G comes up with a confirmation on who the next CEO would be, investors would be shrouded in ambiguity and continue with their guessing game.
Conclusion
Any good stock will have its downsides. It is up to the investor to make a thorough analysis of such stocks and time their investment properly, so that they derive full benefits. The above mentioned factors are just few points of caution for investors of P&G. The company is too big to be intimidated by all these. Investors should make their decision after doing a thorough study on all these factors, so that they are treated to the full benefits of a stock as big as P&G.
