Often it’s best to embrace change. It’s those companies that sit back and wait for the changing economy to dictate their businesses’ future that often finds themselves without one. For Procter & Gamble Co. (ticker: PG), it’s betting heavily on the belief that change is what it needs.
Over the past two years, Procter & Gamble has undergone an effort to downsize the number of products it sells and has cut costs in the form of layoffs and by increasing efficiencies, like building a new massive manufacturing plant in West Virginia that will serve a large portion of East Coast customers. Yet, its biggest change may be the promotion of new CEO David Taylor, who took the helm in November, becoming the third head of the company in less than three years.
PG is also a stock that has been stuck in neutral — up just 6 percent since 2014, matching the rate of growth of the Standard & Poor’s 500 index. Will Taylor be able to push the consumer staple into hyperdrive? Or will the recent declines in revenues and profits leave him searching for the next big change?
Downsizing on a grand scale. Under the direction of previous CEO A.G. Lafley, P&G began cutting down its brands. It’s reducing the number under its umbrella by more than 100 in an effort to better focus on larger names, including Tide detergent and Gillette razors.
[Read: The Most-Loved Restaurants on Social Media.]
While it will shutter some names, in July 2015, it agreed to unload a large portion of its beauty business, including Clairol and Covergirl, to beauty company Coty (COTY) for $12.5 billion, the sale of which is expected to close in October. By the end of its shedding efforts, P&G plans to have 70 to 80 brands under its name.
Much of the businesses that P&G has decided to shed were the “less profitable areas of the portfolio,” says Morningstar analyst Erin Lash. This will allow the company to “maintain the scale and entrenched relationship with retailers,” while sending more resources to the core brands.
While the 43 brands that P&G will unload to Coty haven’t yet been taken off the balance sheet, it saw sales fall 7 percent in the company’s fiscal third quarter. Investors need to see an increase in organic growth that would indicate efforts to reinvest in the core brands are taking hold. Yet, that only grew 1 percent in the quarter. It’s the “most important metric,” UBS analyst Stephen Powers says.
A closer to 4 percent organic growth would put P&G back up at a level that it often experienced in the past, but to accomplish that it would need significant reinvestments, Powers says. The tricky part will be figuring out what each brand needs and which channels are growing fastest to maximize the investment. It’s still unclear where the reinvestment will eventually land.
[Read: Investors Beware of the Sleeping Bear.]
Cost-cutting efforts could provide a nice boost. To help pay for the reinvestments, P&G launched a second round of cost-cutting efforts. Taylor says that P&G will cut $10 billion from its expenses over the next five years. It’s not yet clear how the company will do that, particularly since it comes just four years after the company originally made the same claim. P&G is ahead of schedule when it comes to the initial $10 billion cut, which has included removing 20,000 jobs.
While reinvesting back into the company and providing some to shareholders will likely be at the top of P&G’s agenda, S&P Global Market Intelligence analyst Joseph Agnese would also like to see an increase in advertising and marketing efforts, which have declined over the past year. “It’s a key” to P&G’s future success, he says. It can outspend nearly all competitors when it comes to advertising, which will “support organic acceleration of sales.”
Changing the management style to engineer growth. A reason that P&G has struggled to turn around its organic growth is due to the lack of significant new products. It hasn’t created a new annual billion-dollar product in over a decade, which is a problem for growing a company that has a $225 billion market capitalization.
In order to encourage more innovative sparks, Taylor is switching how his top managers are paid. Previously, the company provided bonuses to senior managers based on the performance of the region in which the manager operated. A manager’s business unit could have had a down year, but because the U.S. region jumped, he could see a sizeable pay increase. This left it difficult to react to changes, particularly in areas like China where the managers have a better understanding of local trends, since upper-management controlled strategy, Agnese says.
Taylor, instead, wants to tie these bonuses closer to how the manager’s individual business unit performed. This ensures decisions on products and tactics are tied closer to those that work next to the consumers and retailers. “They are more in touch with local markets,” Agnese says. “They have more control, because they know the [market] better.”
It’s too early to tell if this strategy will turn around innovation efforts, though.
You can get paid to wait. How you view P&G as an investment may depend on how long you have to wait. Long-term, many of the initiatives P&G pursues, like fixing the lack of innovation and cutting of costs, will take time to play out. But it’s one of the “more attractive names” in the consumer staples space, Lash says.
It comes at a price though. With a 2017 price-earnings ratio of 21.5, P&G is at its five-year average. While it’s a slight discount, compared to its competitors, it hasn’t shown how it will innovate to encourage trading at a premium to that average, says Agnese.
[See: 7 Global Goats That Could Bring Market Mayhem.]
If you do have time to watch the changes unfold, however, then it pays a 3 percent dividend yield.
More from U.S. News
7 Stocks to Buy When a Recession Hits
8 Soaring Stocks That Suffered the Big Bounce
4 Things to Know Before Buying Procter & Gamble Stock originally appeared on usnews.com
