The ultimate defensive stock
Growth stocks are great, but for balance every portfolio needs a couple of stocks like Procter & Gamble.
NEW YORK (Money) -- There's no question the greatest opportunities in today's stock market are big growth stocks that are undervalued and likely to thrive once interest rates start coming down.
But few investors can assemble a suitable portfolio using growth stocks alone. Most people who are trying to reach long-term financial goals need defensive stocks to balance their growth investments.
The ultimate defensive stock would be a giant company with diverse products that have leading market positions. Any consumer products would have brand names that were widely recognized and popular.
Ideally, the major product lines would be the kind that hold up well in a recession. In addition, the company would be extremely strong financially and would have a long record of rising dividends.
P&G is the world's largest consumer products company with 22 billion-dollar brands. The diverse product mix includes health and beauty items, household products, snacks, razor blades and batteries.
Among the well known brand names are Tide, Crest, Head & Shoulders, Pringles, Gillette and Duracell. Sales of such products hold up well even when the economy slows.
Profit margins are fat, and P&G has thrown off more than $12 billion in cash over the past year.
In the most recent quarter, sales grew 27 percent, compared with a year earlier, thanks to the 2005 acquisition of Gillette. Not counting Gillette, sales were up a healthy 6 percent.
Earnings per share rose almost 10 percent, after adjusting for dilution caused by the acquisition.
Apart from continuing growth in P&G's existing brands, the company should get a big earnings lift as the $57 billion Gillette merger is digested.
When P&G acquired the razor company, it looked as if the cost of the deal would dilute earnings per share for three years. But the merger also offers the opportunity for more than $1 billion of pretax annual cost savings.
What that means is that by 2008, Gillette should have gone from being a drag on profits to a major contributor with its own rewarding growth opportunities.
The result is that earnings growth should accelerate over the next couple of years from 10 percent to 11 percent or 12 percent annually.
P&G stock now pays a 2 percent yield, and the company has raised dividends for 50 consecutive years, one of the longest records among blue-chip companies.
If Procter & Gamble has any shortcoming as an investment, it's that the company's strengths are well recognized and the shares are fully priced.
After adjustment for the June fiscal year, P&G stock trades at about 20 times earnings for calendar 2007.
That's hardly an undiscovered bargain. But not all your investments should be stocks waiting for a rebound. It's worth paying full price for a few companies if they offer solid prospects for safe, predictable growth.