CINCINNATI (TheStreet) -- The bull market in stocks has been hot for more than a year, though as investors learned with regulators' fraud charge against Goldman Sachs (GS) - Get Report last week, the risks are still very real.
When risks rise, investors turn to companies such as consumer-goods maker
Procter & Gamble
, one of the lumbering behemoths of the
Dow Jones Industrial Average
Procter & Gamble is largely unaffected by stock-market risk, which can be seen in its returns over the past two years. While the
S&P 500 Index
is down 33% since 2008, Procter & Gamble has lost only 4.5% of its value. The company is diversified in its product offerings and geographic exposure.
Only 43% of Procter & Gamble's revenue is derived from North America, while developing countries account for 32%, and Western Europe makes up 21%. That enables the company to tap into growth in hot economies as more mature markets experience weakness. The product mix is conducive to counter-cyclical success. Fifty-one percent of revenue comes from household products, and the rest from beauty care and the Gillette razor division.
Over the trailing 12 months, when the U.S. economy was mired in its deepest recession in 80 years, the company managed strong profits. The return on equity was 18%, and the operating margin topped out at 21%, the highest in the non-durable household products industry. Procter & Gamble's offerings may not be as sexy as
Research in Motion's
BlackBerry, but its bread-and-butter products are needed by people in good times and bad.
Procter & Gamble isn't a gigantic stock-market gainer, but with a dividend yield of 2.8% and a beta value of just 0.54, it can be a cornerstone for diversification. The stock market is in a weird place right now -- it's gaining on signs of strength, but there are numerous signals that the risks are still very real.
As Goldman Sachs showed on Friday, a company announcement can come at any time that sends the stock market into a panic gain. Goldman's stock plunged 13% on Friday after the news of the fraud charge, and rose 1.6% yesterday. Procter & Gamble is the perfect investment to limit exposure to the riskiest assets, while still being able to enjoy some of the upside that a hot stock market brings.
In terms of valuation, Procter & Gamble is a bit of an oddball. Based on a price-to-earnings value of 17, it's fairly valued, or maybe even slightly overvalued, as its competitors clock in at 15. However, when comparing the stock to rivals based on price-to-free cash flow and price-to-book, Procter & Gamble is a steal.
Procter & Gamble boasts a P/FCF ratio of 13 versus 15 for the industry, while its P/B ratio is very low at 2.7 versus 20 for the sector. Those ratios are more telling for Procter & Gamble since they relate directly to cash coming into the business and the value of the company's assets. The P/E ratio focuses mainly on earnings expectations, which may be skewed or overly pessimistic given the recent state of the economy.
When all else fails in the world of investing, there are only a few companies that can be relied on to plot a steady course. Procter & Gamble is one of them.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.