February 12, 2012 in Business

Motley Fool: Procter & Gamble shows promise for stability


How will Procter & Gamble (NYSE: PG) fare in 2012? Well, if the economy is weak, consumers may not stop shaving or brushing their teeth, but they may forgo higher-end items such as tooth-whitening products and may even pass up name brands such as Crest and Tide in favor of private-label products.

In the meantime, P&G and its peers have been juicing their growth rates by expanding their reach into emerging markets. The slice of P&G’s sales that came from outside the U.S. expanded from 62 percent in fiscal 2010 to 63 percent in fiscal 2011. If a 1 percent change doesn’t sound like much to you, consider that when we’re talking about nearly $83 billion in revenue, it represents hundreds of millions of dollars.

Then there are rising commodity costs, which threaten profits. P&G’s strong brands do give it more power to raise prices, but in a tough economy that’s problematic, as price hikes may give customers the excuse they need to trade down or buy from a competitor.

Procter & Gamble’s stock is currently valued fairly and worth holding, but it’s not an irresistible bargain. But with strong brands and dependable operations, it shouldn’t give investors many sleepless nights. Factor in a solid 3 percent-plus dividend yield, and you may want to consider it for your portfolio. (Motley Fool newsletters have recommended shares of Procter & Gamble.)

Ask the Fool

Q: General Electric hasn’t split its shares since 2000. Is that because it has too many shares outstanding already? – C.G., Augusta, Ga.

A: It doesn’t typically work that way. Splits often take place when a stock’s price is deemed too high. Splits can be largely a psychology-driven event, making a stock look “cheaper” to some investors. If stocks never split, then a single share of some big companies would cost as much as a car or house.

General Electric does have a lot of shares – more than 10 billion. The number of shares isn’t a measure of a company’s size, though. Sirius XM Radio has close to 4 billion shares, for example, while Boeing has fewer than a billion.

What matters much more than stock splits or numbers of shares is how strong a firm is, how quickly it’s growing, how successfully it’s competing and how each share’s value is increasing.

General Electric recently posted operating earnings per share for 2011 up 22 percent over year-ago levels. The company’s backlog of infrastructure-related orders, at $200 billion, set a record.

Q: How do you rebalance a portfolio? – M.D., Newark, N.J.

A: Imagine that three years ago you invested half your nest egg in stocks and half in bonds. If you want to keep that balance, but your stocks have grown to become 60 percent of your portfolio, you might sell some stock and add to your bond holdings.

Rebalancing means adjusting the percentage of your portfolio represented by various holdings (such as stocks, bonds, etc.) by reallocating your money. Don’t overdo it, though. If your portfolio changes from 50 percent stocks to 51 percent, that’s not cause for alarm.

My dumbest investment

My dumbest investing move was thinking that SonicBlue, the second stock I ever bought, had better technology in its ReplayTV DVR than TiVo’s machines. Imagine – it permitted users to easily fast-forward through commercials!

Alas, that was partly the company’s downfall, as commercials are a critical component in the broadcasting business, and broadcasters didn’t like that feature. The company was sued by a group of 28 big media companies, and after spending a lot of money on legal wrangling, filed for bankruptcy protection. Its ReplayTV assets eventually ended up in the hands of DirecTV. Unfortunately, having the technology survive through bankruptcies doesn’t help the original shareholders. – G.H., online

The Fool responds: You’re right – once a company declares bankruptcy, original common stockholders are usually out of luck. (They’re typically last in line, after creditors, any preferred stock holders, etc.) Having the best technology is good, but you also need enough money to get it to market and to be able to fight off competitors and naysayers. Smart strategies and competitive advantages help a lot.

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