In-depth examination for P&G Company

Posted by Melda Research on March 6th, 2019

Procter & Gamble Company is a consumer products company that manufactures sells and markets goods across the world. The company boasts of a wide range of brands in home and health. It operates through five global segments of Beauty, Health Care, Grooming; Fabric and Home Care, and Baby, Feminine and Family Care. The firm operates in numerous countries through mass merchandisers, drug stores, grocery stores, department stores, membership club stores, distributors, specialty beauty stores, baby stores, high-frequency stores, e-commerce and pharmacies. Manufacturing sites are mainly located in United States and 40 other countries.
Corporate governance
Procter & Gamble has a system of rules, processes and practices by which the organization is directed and controlled. It essentially involves balancing interests the firm’s stakeholders including shareholders, customers, management, suppliers, customers, financiers, government and community. Procter & Gamble governance consist of policies, laws, practices and procedures that protect the well-being of the company (Procter & Gamble, 2017).
Board of directors
Mr. R. A. Shah heads the board of directors. It also comprises of one Managing Director, six directors, and Chief financial Officer and Company secretary. The purpose and responsibility of the board is to represent and act on behalf of company’s shareholders. The board may either act as a whole or through its four committees. Board committees include Audit Committee, Stakeholders relationship committee, corporate social responsibility committee and Nomination and remuneration committee. The Board and its committees are responsible for establishing and assisting the organization to attain business and company objectives through oversight, counsel and review (DePamphilis, 2009).
• Approving and monitoring critical financial and business strategies of the firm
• Assessing major risks that the firm is likely to face and identify strategies to mitigate the risks.
• Approving and monitoring major corporate actions
• Overseeing processes to ensure compliance with applicable laws and regulations around the world.
• Overseeing processes to ensure that company’s financial statements are accurate and complete.
• Monitoring the effectiveness of the firm’s internal controls
• Selection, evaluation and setting appropriate compensation for Company’s Chief Executive Officer
• Overseeing succession planning for positions and reviewing the recommendations of firm’s management and electing the Company’s principal officers.
• Overseeing the compensation of the firm’s principal officers elected by the Board.
Company regulations require the board to comprise of ten to fifteen members. The composition of the board is determined by the independence of board’s Chairman. If the chairman is independent, the Board is made up of at least a majority of independent members. If the Chairman is not independent, it will be made up of at least 2/3 independent members. The board also comprises non-employee board members who represent the balanced best interests of organization’s shareholders as a whole.
Dividends and Repurchases
• Dividend Policy
Procter & Gamble has consistently increased dividend payout along the years. The company has one of the longest streaks in the history of stock market. Yet the rate of increases has become much smaller lately. Shareholders have not seen an increase to the payout rate since 2008. It 2008, the ratio increased from 13% to 14%. In 2015, the company’s payout ratio increased substantially as .59-per-share dividend replaced the .44 per share that the firm produced in earnings, resulting in a payout ratio considerably above 100%. In 2016, the increase was less than 1%. However, the dividend amounted to approximately 70% of earnings in financial year 2016, significantly higher than 50% that most blue-chip companies aim for.
• Dividends information and Stock repurchases
Procter & Gamble has had a high dividend Payout ratio that is significantly higher than the industry average and competitors. The company has consistently paid dividend for at least the last 10 years. The long dividend history suggests the company is established in the market it operates and that the company is likely to distribute dividends for a significant period of time.
• MM theory
MM theory suggests that a firm’s capital structure has an effect on the firm’s value. A firm may decide to use debt financing from a tax perspective. Debt financing can be advantageous for both the firm and the investor. Around the world, individuals and firms are subject to income tax and corporate tax respectively under a majority of tax systems. This results to double taxation of dividends in case the firm is financed through share equity. In this case, Procter & Gamble stands to gain considerably since interest payments are deductible from the firms taxable income compared to share repurchases and dividends which are not deductible. Another advantage that accrues to companies that significantly use debt financing is that it ensures discipline among management and forces them to make extra efforts to surface the debts and interests payments. The advantages of debt financing accrue to bank loans and use of bonds. However, the costs of debt financing can outweigh the benefits. Debt financing can result to bankruptcy in event of the firm’s inability to repay debts. There is uncertainty concerning the riskiness of investing in the company due to the mounting debts.
• Trade-off theory
Trade off theory is useful when determining their debt capacity. The trade off theory explains that debt is cheaper for a firm because it does not involve risk sharing and can be collateralized compared to equity which has a residual claim. A firm can therefore initially lower its weighted average cost of capital through leverage. However, Leveraging increases the firm’s financial risk and must service its debts regularly unlike the case with equity. In this case, Procter & Gamble must balance the financial risks and the benefits of using debt financing.
• Signaling theory
Signaling theory suggests that the form of financing used by a company can be used in predicting the stock’s future performance. In this case, Procter & Gamble’s debt can interpreted to be positive particularly because the signal positive because the firm has the option of acquiring ownership of the asset upon completion of the lease period. The leases are long term types of financing compared to bonds and bank loans. The lease agreement is generally not cancellable therefore provides the firm with certainty concerning the flow of finances.
• Pecking order theory
The pecking theory explains accordingly why firms finance themselves through retained earnings. The company uses debts as the second option and equity as the last resort. According to the theory, different types of securities send different types of messages to the market. Debt is interpreted positively by the investors as confidence by management to service the debts. Use of equity finance sends a signal that management consider the firm to be overvalued which eventually would result a drop in share prices. Pecking order theory relates to the agency theory in the analysis of capital structure. It describes that a firms financing decision are affected by the attempt of management to minimize shareholders supervisions.
• Market Timing Theory
The market timing theory suggests that firms can move in and out of the market or switch between sources of financing by assessing economic data and other market indicators to determine whether to finance the firm using with equity or debt instruments.
Company Valuation
Sensitivity analysis
The sensitivity analysis of Procter & Gamble Company reveals that the company is a high gamble. The forecast shows that a base case assumption of 80% of Cost of Goods to sales would be the result of M in development cost. An IRR of approximately 21% would be earned. If development cost of M with an 85% assumption would be used, it would result in an IRR of approximately 8.2%. This means that the gamble is high since the development costs and the IRR show a significant variance given a best case and a worst case scenario,
The current ratio of 1.10 demonstrates that Procter & Gamble Company has the ability to meet its current obligations as soon as they fall due. Debt-to-Equity Ratio compares the debt and equity of a business. Procter & Gamble’s debt-to-equity ratio for the financial period ending 2016 was 54.53. This shows that the company debt-to-equity ratio shows that the business utilizes more debt compared to equity financing.
The Return on Equity ratio evaluates the ability of business to effectively produce profits from shareholders investments. The company’s Return on Equity is 0.94. Return on Equity is a significant measurement for potential investors in determining how effective a business is in utilizing available resources. From this perspective, Procter & Gamble is good using its resources to generate income.
P/E ratio is made up of earnings include stock value components. Earnings are important to different stakeholders since they present profits. They also represent a company’s livelihood. P/E ratio for Procter & Gamble for the year 2016 is 24.56. From an investor’ perspective, the P/E ratio demonstrates the business’s past performance and also takes into account market expectations for the business’s growth because it represents the worth of a business. The figure shows the investors’ high level of market optimism. Therefore, the company is appealing to investors and predicts a high growth potential in future.
The Return on Assets ratio shows how profitability a company is in relation to its total assets. According to the figures based on 2016 financial report, the return on asset ratio of Procter & Gamble is 0.074. The ratio demonstrates that company efficiently manages its business to make profits compared. From an Investor’s point of view, Procter & Gamble high return on assets shows that the business has a higher efficiency in utilizing its asset collection (Procter & Gamble, 2017).
Impact of increasing debt percentage
Procter & Gamble’s higher debt-to-equity ratio shows that the business uses a high level of debt financing. This means that company faces a very high financial risk given that a high level of financing comes from creditors.
Lease and hybrid securities of the company
As of March 2017, Procter & Gamble Company had a long-term debt and capital lease obligation of ,633 Millions.
Mergers of the company
Procter & Gamble completed its merger with Coty in October 2016. The merger only involved the company’s color cosmetics, fine fragrance, hair color, salon professionals and certain styling businesses making Coty the largest third largest beauty company in the world. The merger brought together a large portfolio of a range of beauty products. As a combined business, Camillo Pane became the new CEO of Coty. The company accepted an offer of .5 Billion to Merge 43 of its brands. The merger is a strategic one as Coty is a global beauty product manufacturer with brands in fragrances, skin and body care products and color cosmetics. While Procter & Gamble a global manufacturer, Coty is a global distributor of products. The restructuring is expected to double Coty's cash flows and revenues and leverage Procter & Gamble’s capability as one of the largest players in the beauty industry (Kanter, 2009).
Acquisitions of the company
Procter & Gamble has made various acquisitions. In 1985, the company acquired Richardson-Vicks. In 1989, another acquisition with Noxel was made. In 1990, the company acquired Old Spice for 0 million. In 1991, it acquired Betrix and Max Factor for $ 1.14 billion. In 1994, the company acquired Giorgio Berverly Hills for $ 150 million. In 1999, the company acquired an online pure-play beauty concept. These were some of the major acquisitions by Procter & Gamble in the most fast growing and profitable segment of beauty and personal care. Procter & Gamble early acquisitions were meant to diversify its business risk by expanding into different market segments and different geographies where it had no presence earlier. By acquiring Joy perfume in 2001, Procter & Gamble had was seeking complimentary products and brands which helped it achieve synergies in scale in promotion, marketing and distribution.
In 2001, Procter & Gamble acquired Clairol for 4.95 billion dollars in cash. The deal was made with the intention to acquire Clairol’s strong hair business. Procter & Gamble had no major presence in the hair color segment while Clairol was the market leader through herbal Essences line. The acquisition was a strategic decision that saw Procter & Gamble acquire the biggest player after L'Oreal. The immediate effect of the acquisition was a 2.5 % increase in sales despite the company having recorded a stagnated sale trend in the previous years. In terms of marketing and distribution, Procter & Gamble was able to achieve economies of scale and add value as it marketed and distributed Clairol’s products with its existing brand of products.
With a growing market, it was important to expand into newer locations. For Procter & Gamble, it meant expanding to Latin America and Europe. With this goal in mind, the company acquired Wella in 2003. Wella had a dominant market share in hair care market and a leading marketer of beauty salon products. Wella had ventured into Europe and Latin America already. This came in handy as Procter & Gamble had a wide reach in the United States. Procter & Gamble aimed at having a dominant position in the hair care segment. With the acquisition, the company would complement Wella’s personal hair care products like Head, Pantene and Shoulders as well as Herbal Essences. As expected, the acquisition led to double digit growth in sales in 2004.
One of the firm’s significant acquisitions was made in October 2005 when the company completed an acquisition of The Gillette Company. The acquisition agreement provided for the exchange of 0.975 shares of company’s common stock on a tax-free basis. 962 million shares of Procter & Gamble Company common stock were issued for each of The Gillette Company. The value of shares issued was equivalent to the average company stock prices for a specific period. Procter & Gamble also issued 79 million stock options to acquire Gillette’s outstanding stock options. The purchase method of accounting showed a total consideration of .4 billion including common stock, the acquisition costs and the fair value of vested stock options.
The acquisition was characterized by a new grooming reportable segment. The personal care businesses, batteries and Gillette oral care were subsumed within the Fabric Care, Health Care, Home Care, and Beauty segments. The Gillette Company had acquired a market leadership position in various product categories including oral care, blades and razors and batteries. Total sales for the company prior to acquisition in December 2004 amounted to .5 billion. To obtain regulatory approval, Gillette firm was required to divest certain overlapping businesses including Rembrandt, Spinbrush toothbrush business, Right Guard and other deodorant brands during the financial year that ended in June 30, 2006.
As a result of the acquisition, the company announced a share buyback plan, which was completed in July 2006, under which .1 billion of common shares were acquired either from private transactions or through the open market. Gillette Company assumed met the exit cost amounting to .2 billion. This is considered the biggest acquisition of Procter & Gamble Company. Gillette was already an established brand operating in 14 nations with 31 plants. The company had significant presence in BRIC countries. Gillette’s strong presence across geographies would lead to significant cost reductions and strong synergies (Procter & Gamble, 2017)
Procter & Gamble Company is a consumer products company that manufactures sells and markets goods across the world. The purpose and responsibility of the board is to represent and act on behalf of company’s shareholders. The board may either act as a whole or through its four committees. Procter & Gamble has made various acquisitions.

DePamphilis, D. (2009). Mergers, acquisitions, and other restructuring activities: An integrated approach to process, tools, cases, and solutions. Academic Press.
Kalogeropoulos Demitrios (2016). Procter & Gamble Co's Dividend: 3 Reasons to Expect a Bigger Raise in 2017.
Nasdaq (2016). Procter & Gamble Company (The) (PG) Risk Assessment.
Procter & Gamble Co. (2017) Ratios.

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