Procter & Gamble (PG 0.32%) has an incredible dividend track record, with a huge string of 67 consecutive annual dividend increases under its belt. It has deftly navigated difficult operating environments before. And so far, it has done an excellent job in the face of high inflation this time around.
But fiscal 2024 second-quarter results hint that the consumer staples icon could be facing a tougher future.
Procter & Gamble is executing well
In fiscal 2023, P&G's organic sales were rock-solid even in the face of fast-rising costs, thanks to a spike in inflation. To put some numbers on that, in the first quarter of that year, organic sales rose 7%; in the second quarter, 5%; the third quarter, 7%, and the year ended with 8% growth in the fourth quarter. That was followed by 7% growth in the first quarter of fiscal 2024. Pricing has been a big driver of growth, as P&G passes on rising costs to consumers.
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That said, in the first quarter of fiscal 2024, volume fell 1%, meaning that price increases were the only reason for the increase in organic growth. With fiscal second-quarter earnings now out, the trend has subtly shifted. Organic sales were up just 4% with volume down 1%.
Again, price was the main driver of organic sales growth, but it was the lowest growth in a year and a half. That's not a great sign and suggests that consumers could be starting to push back against rising prices.
If you own P&G or are looking at it, here are three things you need to watch in the quarters ahead.
1. Where does volume go from here?
The normal approach to rising inflation is for consumer staples companies like P&G to raise prices. Customers usually pull back, which shows up as lower volume. And then, as consumers get accustomed to the new prices, volume starts to increase again. Organic volume hasn't been that strong for around six months at this point. That's not a great sign for P&G.
As you examine the next few quarters of earnings results, you'll want to make sure that volume doesn't start to decline at a faster clip. Of note, volume fell 4% in the company's healthcare business in the fiscal second quarter. Management provided logical reasons for that drop, but it could also be the canary in the coal mine.
2. What happens to organic sales growth?
So far, price increases have allowed P&G to maintain an upward trajectory in organic sales growth. But if volume trends are weak, it might be forced to shift gears.
The big fear for investors should be a market-share battle with peers that leads to price cuts. This could result in a downward spiral for the entire consumer staples industry, which would take even strong brand owners like P&G along with it.
Organic sales growth slowed dramatically between the fiscal first and second quarters of 2024. If it keeps falling, P&G could be in for some rough sledding.
3. Can innovation save P&G?
One of the things that separates P&G from the pack is its focus on creating new and improved products. Basically, it isn't simply charging higher prices for the same thing. It is trying to earn the higher prices it is charging by offering product improvements and entirely new products.
This is what has long driven strong market-share performance. But things haven't been going so well with its market share of late.
In the fourth quarter of fiscal 2023, the company was able to increase market share in 38 of the 50 category/country combinations it tracks. That fell to 31 in the fiscal first quarter of 2024 and dropped again to 28 in the second quarter. If P&G's ability to distinguish its products from that pack continues to slip, it will get harder to continue growing organic sales.
Not the end of the world, but not good
Procter & Gamble is a well-run company, and even well-run companies go through hard times. So a slowdown in performance is hardly the worst thing that could happen.
But this doesn't change the fact that the operating environment appears to be getting more difficult. That, in turn, is likely to affect the company's performance and the stock price.
If you own this Dividend King, you should be looking past the headlines to watch the finer details, including volume, organic sales, and the company's ability to differentiate its products from the competition.
If you don't own it, you'll want to monitor the same things, with the notion that a performance shortfall could potentially open up a long-term buying opportunity.
Reuben Gregg Brewer has positions in Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
